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Complete Guide to Mortgages |
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Cash-Back Mortgages
With a cash-back
mortgage you get a single lump sum of money either when
you take on the loan or after the first monthly repayment.
Usually a percentage of the amount borrowed, the cash-back
is designed to be an incentive for borrowers who decide
that they need a bit more cash available when they buy a
house.
Most cash-back deals offer around 3% to 5% but it is
possible to find deals with as much as 10% back. It can
also be a set figure. However, the higher the percentage,
the longer you are likely to be tied in for and some
mortgages carry heavy redemption penalties that may even
require you to pay back some of the cash-back.
Rates:
Fixed,
variable, discounted and capped rates can all come with
cash-back and they are not solely aimed at first-time
buyers who need the money. Cash-back mortgages are also
available for remortgaging.
However, you may find that the higher the cash-back, the
less competitive the rate of interest, either initially or
once the mortgage reverts to the lender's standard
variable rate (SVR). This is because the lender wilt look
to recoup the cash-back money over the life of the loan by
charging you more for borrowing it in the first place.
You will probably have to choose between a cash bonus and
an ultra-low fixed rate or favourable discount.
Terms
& Conditions:
Naturally
there are some strings attached to cash-back mortgages. If
you want to move to another lender, another mortgage, or
pay off a lump sum within the initial period of the
mortgage - or within the tie-in period after wards - you
are likely to incur heavy early redemption charges. These
wilt either be in the form of some, or even all, of the
original cash-back sum.
Some lenders have a sliding scale of redemption charges
that decrease each year or in steps. For example, it might
be a case with 10% cash-back that if you pay off the
mortgage in the first year you'll pay back 10% of the
amount borrowed, 9% in the second year and so on.
It is understandable that large cash-back deals will see
you subject to heavy redemption penalties as this is the
only way the lender can get its money back if you try to
pay back the mortgage early. However, being tied in for
longer than six years at a variable rate, for example,
you'll probably find that a mortgage at a lower rate but
without cash-back works out as a better deal in the long
term.
Equally, the size of the cash-back sum is often linked to
the percentage of the property value you are looking to
borrow. Some of the largest cash-back percentages are
available only on mortgages up to 75% LTV.
One-Off
Sums:
There are
other mortgages that offer a relatively small cash-back
deal - from £200 to £400. They are designed to
appeal to people who need a cash sum to spend on
legal fees or surveyors costs - although sometimes this
will be specified. Often, though, they are not described
as cash-back mortgages at all, coming under a 'fixed-rate
with cash-back' heading, for example, and won't usually
have such severe redemption penalties.
Alternatives:
If you
really do need some extra cash at the start of your
mortgage but don't feel a cash-back mortgage
provides the best deal for you, there are a couple of
possible alternatives you could consider:
A discount mortgage with a very good initial
rate will mean low payments at the start before it
reverts to a more standard rate
- A larger mortgage - at 85% rather than 80%, for
example, will mean you need less money for the deposit
and have extra money at the start of the term
- An unsecured personal loan will be at a higher rate
than your mortgage but it won't carry the same
redemption penalties and will be separate from your
mortgage
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