Is there such a thing as a 'free' windfall?

Many people carry a credit card that gives them cashback on a regular basis and now the concept is being extended to mortgages.

Abbey (formerly Abbey National) this week launched a new type of home loan where customers get back 1% of their outstanding mortgage balance every two years. They can choose whether to use the money to reduce what they owe, or simply take the cash and do what they want with it.

The deal tracks the Bank of England base rate, and may tempt people who like the idea of a cash "windfall" every couple of years. But the rate is higher than with other tracker deals, so it could be argued that you are paying more to get your "free" cash. The Abbey deal is called the Reward Mortgage and has a rate of 1.24% above the base rate for life. That gives a current pay rate of 5.24%.

It's not a totally new concept - until a couple of months ago, Standard Life Bank was offering a similarly-named deal which also paid a bonus of 1% every two years. But the crucial difference is that with the Standard Life Bank deal, the money had to be used to pay off the mortgage.

Abbey's mortgage has no restrictions on what the cash is used for, though it may well be sensible to use it to reduce the outstanding balance and get rid of the mortgage early.

"This is the only mortgage on the market that rewards customers with a regular lump sum in cash," says the bank. "We think it's a great new choice for people who don't want the cost and bother of remortgaging every couple of years."

Plus points are that there are no booking fees to pay and no early redemption penalties, you don't have to pay back any of the cash lump sums you have received should the mortgage be paid off early, and the loan is portable, so you won't lose out if you move home.

As an example, on a £100,000 repayment mortgage, a borrower taking out the deal this month would receive a payment of £959 in two years, then £913 in April 2008, £863 in April 2010, £807 in April 2012, and so on - a total of more than £7,000 over 25 years.

Before each payment is made, you will be given the option of taking the money as cash or using it to reduce what you owe.

Simon Tyler at mortgage broker Chase de Vere Mortgage Management says the deal "is a nice idea and will suit a lot of people". He adds: "If you strip out the cashback, it basically equates to a rate of 0.74% above the Bank of England base rate for the life of the loan, which is very competitive. But if you take the cashback option every two years, the rate puffs out a little to 1.24% over base for life, which is still not too bad. And it has the flexibility to allow you to take the cash or repay it off the mortgage, which will be handy for first-time buyers and the like, who could do with a bit of extra cash from time to time."

But David Hollingworth at Bath-based broker London & Country Mortgages is not so keen. He says a rate of 5.24% isn't very competitive when one considers you can get two-year tracker deals priced at under 4%. "You're paying more interest in order to earn your cashback," he says.

London & Country is offering its own tracker deal funded by Alliance & Leicester where the current pay rate is 3.94% for the first two years (base rate minus 0.06%), with no redemption penalties at any time.

Good deal for second-timers

Are you looking for a better mortgage deal because you are putting down a large deposit?

A new offer from Halifax may be attractive for second and third-time movers who have built up large amounts of equity, according to mortgage brokers Charcol.

For purchasers with a minimum 40% deposit, Halifax is offering a tracker mortgage of bank base rate minus 0.26%, giving a pay rate of 3.74% until September 2005, followed by base rate plus 0.34%.

Borrowers with smaller deposits qualify for lower discounts.