Mortgage lenders are tempting homeowners with cashback of up to lb1,000 once they remortgage. But they are cashback mortgages just a gimmick or do they really provide a great deal?
With the Bank of England having increased the bottom rate earlier this year, many householders are certain to consider remortgaging, and banks do their finest to lure them in with competitive deals.
Here, we take a closer look at cashback mortgages and provide suggestions about the best way to find out the true price of a home loan.
New deal offers lb1,000 for remortgagers
Tesco Bank is offering customers between lb250 and lb1,000 cashback when they remortgage to one of their new product range.
Alternatively, borrowers can opt out of the cashback and instead use Tesco’s standard conveyancing service for free – a feature which was previously offered as standard on its remortgaging deals.
Tesco’s two-year fix offers lb1,000 cashback according to borrowing between 75% and 95% loan-to-value, while it’s five-year product at 60% to 75% loan-to-value has a lb250 incentive.
Are buyers flocking to remortgage?
In times during the economic uncertainty, with a recent increase in the Bank of England’s base rate, homeowners have to be savvy to ensure they’re on the best mortgage deal.
In certain cases, this means moving to a new fixed-rate mortgage before their current term ends and they're passed on to their bank’s standard variable rate (SVR).
This trend is highlighted by new data from the credit history agency Experian, which shows that the anticipation of the increase in the bottom rate led to more customers searching for fixed-rate deals.
In July, a third (33%) of people searching Experian were shopping for fixes, up from around one fourth in June (27%) and May (24%).
The popularity of moving deal can also be reflected in new data released this week by UK Finance, which found remortgaging had risen by 8.4% year on year, with 37,400 transactions completed at an overall value of lb6.8bn.
How perform the Tesco deals compare?
Tesco is providing an industry leading amount of cashback for remortgagers, but the interest rates are considerably higher than a few of the other deals available on the market.
The cheapest Tesco deal with lb1,000 cashback is a two-year fix at as much as 75% loan-to-value, that is priced at 2.44% (rising for an SVR currently set at 4.04%) and it is available with no product fees. This means an overall cost for comparison (APRC) of 3.8%.*
Extending the search beyond cashback deals, Yorkshire Building Society offers the lowest overall initial rate on the two-year fixed remortgage at up to 75%, costing 1.43% (SVR of 4.99%), though this does provide an arrangement fee of lb1,495, resulting in a higher overall APRC of 4.6%.**
How to check mortgage costs
With cashback incentives and arrangement fees adding layers of complexity to mortgages, it can be tough to compare deals like-for-like.
In this instance, the Yorkshire deal provides a much lower interest rate, nevertheless its fees and higher SVR mean the Tesco deal is a much cheaper option over the term of the deal.
We know this because of the APRC, which shows the overall cost of the deal to assist consumers compare.
Unfortunately, though, APRCs aren’t completely fallible either.
This is because many people remortgage at the end of their fixed period, meaning they wouldn’t have to pay their lenders SVR.
This makes a significant difference within the example above, as the total cost of Yorkshire’s deal is skewed with a high SVR (4.99%) compared with Tesco’s (4.04%).
*Assumed borrowing of lb125,000 over Twenty five years, representative 3.8% APRC. Total amount payable: lb194,100.71. Includes interest of lb68,880.71, Valuation fee of lb220, Booking fee of lb0 and Administration fee of lb0. Repayments: 25 repayments of lb557.00 at 2.44% (fixed), then 275 monthly repayments of lb654.38 at 4.04% (variable).
**Assumed borrowing of lb125,000 over 25 years, representative 4.6% APRC. Amount payable: lb210,223.91. Includes interest of lb83,523.91, Valuation fee of lb205, Booking fee of lb0 and Administration fee of lb1,495. Repayments: 23 repayments of lb495.82 at 1.43% (fixed), then 277 repayments of lb711.62 at 4.99% (variable).