UK households are being cautioned not to be swayed by mortgage cashback offers that promise up to £2,000 but could end up costing borrowers more in the long term. The consumer group Which? has highlighted a mortgage from Nationwide Building Society as a recommended cashback deal, offering £500 to remortgage customers on a two-year fixed-rate mortgage at 4.74%. However, Which? warns that borrowers should look beyond the upfront cash reward and carefully compare interest rates and fees before committing.
Cashback Mortgages on the Rise
Cashback mortgages have become increasingly common as lenders compete for business in a market where fixed-rate deals remain significantly more expensive than at the start of the year. Analysis by Which? of Moneyfacts data reveals that 35% of residential mortgages now offer some form of cashback incentive. This figure rises dramatically among green mortgages, with 96% of products aimed at energy-efficient homes offering cashback rewards.
The largest incentives are typically aimed at first-time buyers and home movers, with some lenders offering as much as £2,000. Remortgage customers generally receive lower rewards, although they have the widest choice of cashback deals. For example, Nationwide Building Society offers a rate of 4.74% with £500 cashback, while HSBC provides £1,500 cashback at a 5.37% rate. Among the most generous offers are those from Yorkshire Building Society and West Brom Building Society, both including £2,000 cashback with rates of 5.42% and 5.67% respectively. Skipton Building Society offers a 5.84% rate with £1,000 cashback.
Hidden Costs of Cashback
Despite the appeal of receiving cash back, Which? found that many deals may not be as beneficial as they first appear. Their analysis showed that 44% of mortgages offering cashback of at least £500 also charged upfront fees exceeding the cashback amount. In effect, many borrowers could end up paying more in fees than they receive as an incentive. The consumer group also notes that a mortgage with a slightly higher interest rate but no arrangement fee can sometimes be cheaper overall than a lower-rate deal with a hefty upfront charge.
Using an example of a £250,000 mortgage over 25 years, Which? calculated that the monthly repayment difference between a rate of 5% and 5.2% is around £30. This means a fee-free mortgage at 5.2% could leave a borrower roughly £280 better off over a two-year fixed period than a 5% mortgage with a £999 fee. However, over a longer five-year fix, the lower interest rate would generally prove more valuable.
Expert Advice
The findings come as lenders continue to compete aggressively for mortgage business, amid expectations that borrowing costs could gradually ease if further interest rate cuts materialise. For borrowers weighing up competing offers, Which? says cashback should be viewed as a bonus rather than the deciding factor, with the overall cost of the mortgage remaining the most important consideration.
