The previous decade’s housing crash and subsequent credit tightening had quite an influence on how mortgage lending operates. In the aftermath, lenders were required by the FCA to take the necessary steps to ensure future customers could truly afford the mortgages they were applying for. Tighter credit restrictions made it more difficult for lenders to lend. So they started turning to incentives to drum up business.
Mortgage incentives are fairly common today. From banks and building societies to private lenders, more are offering incentives as a way of getting customers in the door. They are willing to offer such incentives because they more than makeup for them via mortgage interest and fees.
A word to the wise: choose incentives wisely as a first-time homebuyer. Never assume that you will always come out ahead with a mortgage incentive. You very well may, but you may not as well. Some incentives are structured in such a way that you end up actually paying more in the long run.
One of the most popular incentives right now is cashback. It is offered on mortgages in much the same way it is offered on car loans. You apply for a mortgage and, upon closing, receive a lump sum cash payment from the lender. The question is this: are cashback mortgages right for you?
Understand that lenders are not giving away cash for free. A typical lender has built the cost of that incentive into your mortgage. So look at both your interest rate and APR. If you can get lower rates on a mortgage without the cashback incentive, do lower rates more than cover the amount of cash you would receive with the incentive mortgage? If so, take the deal with the lower rates.
Cashback mortgages are admittedly tempting. It is nice to have a little bit of cash to work with after spending so much money to close your mortgage. You can use that cash to pay some of the expenses you incurred along the way. Or you can use it for something entirely different.
Other Mortgage Incentives
Cashback is not the only incentive lenders dangle in front of first-time home buyers. There are more than a dozen different incentives that vary by lender. Here are just a few more examples for purposes of illustration:
- Low Deposits – The traditional rule in the UK has been to require a 25% deposit before approving a mortgage. Some lenders are willing to go as low as 5%. That means you can finance 95% of the cost of your purchase. Expect to pay higher interest rates though.
- Shared Ownership – A shared ownership mortgage could end up costing you less each month. However, the downside is that the lender owns a share of your home. You pay rent on the portion of your home you don’t own. Note that you can buy out the bank in the future.
- No Fees – Another popular incentive is a mortgage with no fees. This means the lender isn’t charging arrangement fees. In other cases, they simply reduce the fees. This is a particularly good incentive in that it could save you thousands.
- Loyalty Incentives – Some lenders offer loyalty bonuses to customers who use them for mortgages. Said bonuses are usually cashback bonuses.
- Parental Help – Your parents might be able to contribute by way of a parental help incentive. One good example is an incentive that allows your parents to make your deposit for you. However, that deposit is put in a savings account where it earns interest. Your parents get the money back once your mortgage is paid in full.
These five examples barely scratch the surface. There are many more mortgage incentives out there. The point is the same regardless: incentives exist for the benefit of lenders. If lenders can help you along the way, that’s fine, but they do what they do to bring business in the door.
Work with a Mortgage Broker
It is wise to shop around for mortgages before you even begin looking for a house. That way you’ll know what is available to you during your search. And as long as you are shopping around, you might just as well do so by utilising the services of a mortgage broker.
A mortgage broker has access to deals you will never find through a bank or building society. Moreover, a broker can act as your financial adviser as well. A good broker can help you understand mortgage incentives, how they work, and how they will ultimately affect your bottom line.
Remember that mortgage incentives do not always work in your best interests. So it is important to fully understand any incentives you are offered before you agree to a deal. Make sure that no incentive will end up costing you more than you would pay without it.