Can you make mortgage cashback offers work for you?

Mortgage cashback offers are often seen as borrowing from yourself over a 30-year-period with interest.
While these tempting offers generally come with higher interest rates, if customers are savvy and understand the overall costs versus benefits of a cashback offer, they can make an informed decision to take advantage of a cash lump sum and switch lenders before they feel the pain.
Currently, three mortgage lenders on the market will give first-time buyers, movers and mortgage switchers a percentage of their mortgage back in cash.
This is usually 2% at the time of drawdown, paid within 45 days, with some lenders offering a further 1% on the fifth anniversary of the mortgage, provided it remains with that lender and terms are met.
While some people see cashback as a real evil, a large number of customers opt for this lump sum even if there is a lower rate available to them on market. This all comes down to human nature.
From the point of view of mortgage switching, take a customer with a mortgage of €250,000 and 30 years remaining on a standard variable rate of 4.5%.
They may be presented with, for example, a five-year fixed rate of 2.6% where they can save €266 per month or 3% with a saving of €213 per month – but with the latter rate they also get a cash lump amount of €5,000.
The lower saving with the cash lump sum lodged to a current account post-mortgage draw down can be tempting.
The key point is that customers need to make an informed decision and ensure they are aware of the costs associated with the upfront cash.
Mortgage holders also need to be disciplined to ensure they review their mortgage at regular intervals and ensure that they switch mortgage to a cheaper rate when it makes sense to do so.
The real cost of cashback needs to be calculated on both the higher monthly interest rate and the higher balance outstanding on the mortgage due to the rate being charged.
Take the above mortgage amount of €250,000 at 90% loan to value (LTV) being taken out over a 30-year term.
If this customer opts for a five-year fixed product, the lowest rate on market at this LTV bracket is 2.6% with repayments at €1,001 per month.
Compare this to a lender currently offering 3% cashback and a five-year fixed rate, where repayments will be €1,054 per month.
The cashback offer in this case will result in additional repayments of €3,180 over the five-year period.
After five years the borrower would owe €220,602 with the non-cashback lender and €222,267 with the cashback lender, a difference of €1,665.
This is because they are clearing less off the mortgage balance on an annuity, interest and capital mortgage, when repaying on a higher interest rate.
The total benefit 2% cashback at draw down on a €250,000 mortgage is €5,000.
If eligible for a further 1% cashback on the fifth anniversary of the mortgage, this would mean a total cashback over the five years of €7,500.
The cost of the additional monthly repayments over the five-year period of €3,180 plus the extra amount owed at end of the five-year period of €1,665 with the cashback lender, totals €4,845.
In this case, on the surface, the cashback option could be a favourable option for the mortgage holder provided they are aware of the full costs and terms involved.
If the mortgage holder is proactive about managing their mortgage, then at the end of the five-year fixed period they can access options on the market.
If their lender is not competitive, and subject to lending policy, they can then look to switch to another provider.
Other considerations in the above scenario would be the roll-off rate policy, post fixed-rate, of each lender and the overall cost of the loan. The calculations also exclude the time value of money.
It is vital that borrowers make an informed choice by talking to an independent company such as doddl.ie who advise customers on all rate options on the market, and their suitability for the client.

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