What is mortgage cashback?
Mortgage cashback is a marketing incentive whereby a bank offers you a cash amount once your mortgage is drawn down. This cash amount can range from €1,500 to 2% of your mortgage back in cash at draw down plus a further 1% at the end of year 5.
Mortgage Cashback is available to both purchasers and switchers and the cash sum is lodged to your current account generally 40 days after the mortgage is drawn down.
There is no clawback on cashback i.e. if you decide to switch to another lender the bank cannot claim back the cashback from you.
The percentage cashback offers across the different lenders come in different forms 1% cashback, 2% cashback plus 1% end year 5 and 2% at draw down plus 2% of each monthly repayment. So on the 2% cashback offers if you had a mortgage of €400,000 you would get €8,000 just after you draw down your mortgage and then potentially, depending on the lender, a further €4,000 on the fifth anniversary of your mortgage.
Sounds too good to be true?
The lure of a cashback products can be strong, especially when you are stretched when purchasing a new home or could do with some extra cash to renovate the bathroom of a home you own when switching. So is mortgage cashback too good to be true? It depends on the rate being offered.
When it comes to cashback you need to understand if there is a cost to taking your mortgage on a rate that offers cashback. This will come down to what the lowest rate on the market that is available to you versus is the cashback attaching to a higher rate mortgage.
The answer to this is some lenders certainly do have non cashback rates that are lower than cashback rates but depending on your mortgage balance the cashback amount could mean that, during the same fixed term, the effective rate including cashback is lower.
Sounds complicated? Don’t worry our mortgage specialists at doddl can walk you through all rate options available to you, cashback and non cashback and can explain if there is a cost to cashback so you can make an informed decision.
Lets take an example – one of the leading lenders in the market who offer 2% cashback at draw down plus 1% end of year 5. This lender has many rates but to compare like with like on fixed term I am going to take the cashback -v- non cashback on a 5 year fixed rate for non-Green rated homes (so say assuming BER C) of 3.8% without cashback or 4% with cashback.
Repayments based on a mortgage of balance €405,000 over 30 years would be –
Non Cashback rate €1,819 per month (3.5% rate)
Cashback rate €1,934 per month (4% rate)
Difference per month €115 more on the cashback rate.
Benefit – cashback €405,000 *2% = €8,100 at draw down plus if mortgage remains with that bank for 5 years then eligible for 1% €4,050. Total cashback in the 5 years €12,150.
Cost €115 * 60 months (5 years) = €6,900
Plus also to note, if you repay your mortgage over a higher rate you will owe more at the end of the fixed period so this cost on the above example is €3,039.
Total cost = €6,900 additional repayments plus higher capital balance outstanding end year 5 €3,039 = €9,939
Total Benefit = €12,150 (3% cashback in the 5 years)
Surplus benefit on cashback taking only the figures above in the 5 year period. Does not take account of time value of money or roll out rates etc.
Deciding on what rate is best for you is tricky, that’s where we come in, at doddl we crunch the numbers and help you make an informed decision.
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Purchasing a New Home – Start Here
Reviewing Rates on an existing mortgage – Start Here
