Cash back offers – free money or bear trap?
What’s the deal with cash back offers? Free money or a bear trap waiting to catch the unwitting mortgage customer?
There is no doubt that these are enticing incentives, but do they actually save you money? The answer can most definitely be yes, but you need to do the right analysis to make sure. When determining the cost of a mortgage you cannot look at the headline rate or the cashback offer in isolation.
Let’s take an example from one of the leading lenders in the market. They offer a 2% cashback on the amount of the mortgage and 2% on the monthly payment. For customers with a €250,000 mortgage and a property of €300,000 (LTV of 83%) their 3-year fixed rate is 2.80%. So, for a mortgage of €250,000 over 25 years the monthly payment would be ~€1,160 or over the 3-year fixed period this cost would be €41,760. However, they give 2% cash back on drawdown and 2% on each monthly instalment which over the three years add up to €5,835. So, the net cost to a customer over the 3-year fix period is €35,925.
So, the key question is, if there was no cashback offer what would the equivalent rate need to be to cost €35,925 over the three-year period? And the answer is 1.48% which is not available anywhere in the market, so that is a cashback deal worth exploring.
The key issue to analyse with any mortgage is the overall cashflow over the period. Cashback offers introduce cash into your bank account versus just cash out of your bank account and so this needs to be assessed on the overall net position.
There are several issues to address when analysing the economics of a cash back offer:
- What is the cash back offer? These can be absolute cash amounts on drawdown, percentage of drawn down mortgage, % of monthly payments or a combination of the above.
- What is the interest rate of the mortgage with the offer? These will typically not be the cheapest headline rate in the market, but you are getting cash back in your bank account, so the analysis needs to consider the overall new cashflow position.
- How long are you intending to fix for if at all? To determine the overall cashflow of the mortgage you need to understand what the lock in period is.
- Are you confident that you will switch at the end of the fixed rate? If you are happy that you will switch at the end of the fixed term, we now have a well-defined term window by which to analyse the cashflows. If you are not, then you will revert to a higher follow-on rate (Standard Variable rate) and could be paying back that cashback and the full mortgage at a higher rate over the full term of the mortgage which will cost a lot more money.
Sound complicated? It can be, but that does not mean there are not cashback offers that make good economic sense for you. This may not always be the case, but you should avoid a blanket yes/no decision when considering these and other mortgage products until you have done the proper analysis.
The good news is that at Switcheroo.ie we have automated this analysis for you across every permutation of every product across every bank and so we can quickly tell you what your new cashflow positions is, across any product, cash back or not, fixed or variable, for any time period up to the end or the term you choose. Register at Switcheroo.ie for a free consultation on what offers make sense for you given your situation.
Alison Fearon is Managing Director of Switcheroo.ie
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