How do mortgage cashback offers work?

Many lenders in Ireland provide cashback offers as part of their mortgage products. Our clients often ask us to explain what exactly they are getting into with a cashback offer. Is it truly a free gift or are they signing up to a marketing trap?
Our response is that cashback offers can definitely save you money. However, you need to run your cashflow numbers to truly understand what the cashback offer is giving you. We do this for all of our clients.

An example of how a cashback offer can work

To explain better, let’s look at a real example of what one of the leading lenders in the market is currently offering as a cashback offer.
A 3 year fixed rate mortgage of €250,000 on a property valued at €300,000 provides a loan to value ratio of 83%. (You can download our glossary guide of mortgage terms for more information). The lender is offering a mortgage rate of 2.8%.
If this mortgage is taken out over 25 years, the monthly payment would be €1,160. Over the 3 year fixed rate period, the customer’s payments would amount to €41,760. 
This lender is offering a 2% cashback sum on drawdown of the mortgage. Furthermore, the lender is also offering 2% on each monthly payment over the 3 year period if you move your current account to the lender.
This adds up to €5,835.
Therefore, the customer pays €41,760 - €5,835 = €35,925. 
To understand if this cashback offer is a worthwhile one, the customer would need a mortgage deal of 1.48% to pay an equivalent €35,925 in the same time period.
 Currently, there are no mortgage deals on the market offering 1.48%.
 Therefore, the cashback offer in our example is a good deal for the customer.

Questions to ask around cashback offers

There are more than 250 mortgage products on the market in Ireland. Not all of these come with cashback deals, but many do. Therefore it’s important to ask a few questions about the cashback deal you have on the table in front of you. A list of these questions include:
●      What does the cashback offer consist of?
●      Is the cashback offer made up of drawdown, percentage of the drawn down loan and your monthly payments? 
●      What is the overall interest rate of the mortgage offer? Your analysis needs to take into account the overall cashflow amount involving the headline interest rate, your monthly payments and the cashback sum.
●      For how long a term are you going to fix your mortgage?
●      How confident are you that you will switch your mortgage at the end of the fixed rate? We regularly help customers switch their mortgage to save them money.

We’ll find which mortgage is right for you

There is no-one-size-fits-all approach to cashback offers. Nor is there with mortgages. This article by the Competition and Consumer Protection Commission, entitled “Are special offers worth it?” is a helpful read.
We work with our clients to find the exact right mortgage for their needs. Contact us today to discuss your mortgage requirements. We’d be delighted to help.

Claire Mason

New Mortgage Value

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