Cashback mortgage may get buyers out of a fix

Homebuyers trapped with sky-high fixed rate mortgages are being thrown a lifeline following moves to bring out cashback products that also offer discounts or low fixed-rates.

Up to now most cashback mortgages have seduced homebuyers with the prospect of bumper cash offers. But lenders have made the sale only on the basis that customers accept paying monthly instalments at the standard variable rate for up to five years.

There are usually hefty penalties to stop the customer running away with the winnings. And once customers have been safely tied down, lenders begin to make money about halfway through the deal.

Continuing the trend, the Hinckley and Rugby Building Society launched a cashback mortgage this week that pays 6% of the value of the mortgage in cash up-front then shoves customers on to its standard variable rate of 6.94%.

Probably the best known cashback product is sold by Northern Rock, which gives up to 8% of the mortgage value in cash up-front in return for riding on its 6.95% variable rate for five years. Other notable cash-back providers sticking with this theme but offering less cash are the Nationwide building society, Birmingham Midshires, Chelsea building society and the Norwich & Peterborough building society.

Nationwide comes out well although it is offering only a 3.5% cashback to a maximum of ?10,000 because its standard variable interest rate is lower than the rest by about half a percentage point at 6.45%.

But what about a cashback mortgage that also offers a discount? Two arrived on the scene this week courtesy of independent mortgage brokers John Charcol and the Independent Mortgage Collection (IMC).

John Charcol has pitched its offering at housebuyers stuck on fixed-rate mortgages acquired two or three year ago when the then Tory government let the purse strings go and we had a mini boom with interest rates to match.

NatWest and Barclays customers who fixed at the time have been the most notable losers. The two banks built into their fixed rate products penalties based on the difference between the current interest rates and the fixed rate paid by the customer. Both continue this practice with their latest offerings. The problem for homebuyers is that as rates have fallen over two percentage points in the last eight months, the penalties they now face can add up to over ?50,000.

John Charcol's 5.99% fixed rate mortgage with 3% cashback up to ?10,000 does not offer enough cash to compensate most customers trapped at NatWest or Barclays, but it reckons there are plenty of other people who would like to remortgage and switch to lower monthly payments.

Siobhan Hotten, a financial adviser at John Charcol, says: "The combination of the cashback and the low fixed-rate should cover the redemption penalties or contribute towards them."

But penalties in the new mortgage start at 7% in the first year and decline to 2% in the fifth year, giving customers a more severe beating for jumping ship in the early years than the penalties at NatWest and Barclays. There are also some up-front costs to switching, including a ?295 arrangement fee.

Over at IMC, the offer is of a 6.85% variable mortgage with a 2% discount for three years and a 2% cashback and is available for homebuyers needing up to a 98% mortgage. Both mortgages from the IMC and John Charcol are provided by HMSL, a subsidiary of the Halifax.

It does not take a great leap of the imagination to see that the Halifax is aggressively trying to win back market share through the major brokers.

According to Simon Knight, managing director of IMC, most of the big lenders struggled last year to just stand still. "Some of the major players are having to become more aggressive," he says.

The Woolwich has revised some products. Under the banner of its Open Plan flexible mortgage scheme, the five year fix has moved up from 5.45% to 5.65% without a cashback. With a cashback, the Woolwich will charge 6.64% over four years. Sainsbury's is following the trend allowing over and under payments, pitching for customers with a 6.2% variable rate. Remortgagers will have legal fees paid and valuation fees refunded.

Plenty of banks and building societies still add all these fees to the costs of remortgaging, but given the number of lenders stripping out the up-front costs it seems like a mugs game to say yes to one that wants to charge for the privilege of joining them.