Cashback Mortgage
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Cash Back Mortgages
Setting how long the interest rate should be fixed or limited does not depend on fixed or capped CAT standard. (Limited interest rate loans include collared mortgages ie loans where the interest rate can only vary between a fixed maximum and minimum.)
The standard sets a maximum redemption charge. It is 1% of the outstanding loan for each year of fixed or capped period remaining. The maximum falls month by month. The redemption charge on a CAT standard mortgage may be less than this.
Lets take a look at a couple of examples to know it better
- Fristly say, if a borrower repays (not in full capital on a CAT standard mortgage early, then the redemption charge should be in proportion to the total mortgage debt, or less.
- secondly, for a mortgage which is initially fixed or capped for 3 years, and which has an outstanding balance of £50,000 at the point of early repayment, the maximum redemption charge is £500 per year of the fixed period still left.....Explained below
-in the 1st month it is £1,500, ie 3% of £50,000;
-at the start of the second year, with 2 years of the fixed rate left to run, it is £1,000, ie 2% of £50,000;
-after 2 years, with 6 months of fixed rate left to run, it is £250, ie 0.5% of £50,000;
-if half of the loan is repaid early at the end of the second year, with a year of fixed rate left to run, it is £250, ie 1% of £25,000.
What is Cash Back Mortgages???
Cash-back is designed to be an incentive for borrowers who decide they need a bit more cash available when they buy a home, it is generally used to buy furniture and other home appliances. You receive the money either when you take out the loan or after the first monthly repayment.
Most deals offer around 3% to 5% cash-back but it's possible to find deals with as much as 10%. 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 early repayment charges that may even require you to pay back some of the cash-back to the lender.
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, these mortgages are not described as cash-back mortgages at all, coming under a 'fixed rate with cash-back' heading, for example. An advantage is that they will not usually have such severe early redemption charges.
If you need some extra cash at the start of your mortgage, there are several options other than a cash-back mortgage you could consider:
- A discount mortgage with a very good initial rate will mean low payments at the beginning before it reverts to a 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 early redemption charges.
Features Summary
Once the mortgage has taken out, the lender offers a lump sum of cash as an incentive. The amount can vary from lender to lender and depends on the size of the mortgage. The amounts can range from a flat fee of £200 to a percentage of the loan.
Normally the cashback is offered as a package of benefits, but pure cashback products are common. Mortgages offering 5 or even 6 per cent cashback can be found in market. This would mean that a borrower taking out a £50,000 mortgage would receive £3000 on completion (at 6 per cent).
But beware. Although this type of mortgage sounds like a 'free money' deal, lenders do apply certain charges and penalties, such as an Early Redemption Charge with cashback mortgages. Usually a borrower will be tied-in for between five and seven years where a substantial cashback has been paid.
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