Beware the boom in cashback mortgage deals

Too many mortgages are being sold with misleading gimmicks

The chance of getting what appears to be free money can be hugely attractive, especially to first-time buyers who can be fooled into thinking it’s extra cash to buy the essential new items they need for their dream home. (SHAUN CURRY/AFP/Getty Images)

There seem to be attractive-looking new mortgage deals launched every day at the moment as lenders become even more competitive. It’s a chance for potential borrowers - or even those who already have a mortgage - to get a great deal. But it’s important to be wary and count the cost.

Yesterday, for instance, Clydesdale and Yorkshire banks launched a new £1,000 cashback offer. The chance of getting what appears to be free money can be hugely attractive, especially to first-time buyers who can be fooled into thinking it’s extra cash to buy the essential new items they need for their dream home.

But headline cashback deals, or new ‘lowest-ever’ interest rates, invariably come with a hidden cost which can often make them among the poorest deals in the market-place. Take the Clydesdale offer. If you want a two year fixed rate mortgage with no fee, and you have a 10 per cent deposit, you’ll be charged an interest rate of 3.59 per cent. Doesn’t sound too bad?

You might actually do better at the Leek United building society which is currently offering a two-year fixed rate for those with 10 per cent to put down at just 2.69 per cent. Surely that’s a better deal? Or is it? Bear in mind that there’s no £1,000 cashback, and maybe you need to think again. Oh, and there’s also fees of £995 to take account of. Those combined extra expenses could make the deal much less attractive.

If you have a much bigger deposit - of at least 40 per cent - you could be attracted by HSBC’s launch on Monday of the first five year fixed rate deal under 2 per cent. It also introduced a two year fix at just 1.24 per cent. But, again, you should be wary before rushing to sign up. Why? Because both deals come with a whopping fee of £1,499. That charge immediately takes a big chunk out of any savings you may have thought you’d be making.

Too many mortgages are being sold with misleading gimmicks. They should be scrapped to give borrowers a chance of working out the best deal on what is one of the most important financial decisions people may make.