Chelsea Remortgage 6% Cashback - Good Idea or Not?

Madaboutmoney_3

I am about to look into remortgaging and have been tempted at the Chelsea 6% cashback mortgage which will be fixed for 5 years at 6.49%. The remortgage would be for £105000, cashback £6300, the cashback would then pay off the majority of our debt. Or on the other hand I could remortgage and borrow the extra to add to the mortgage, but we have remortgaged so many times that the last time we promised ourselves we wouldn't do it again to pay off debt. Also the Chelsea mortgage would be fixed for 5 years and I have heard rumours that the interest rates could go up, should that be enough to tempt me to go for a 6.49% rate.

What do you think, any ideas would be welcome?

Froggitt

You can get a 5 year fix for 4.99%. You are paying about £1500 a year more interest with your Chelsea deal. Thats £7500 over 5 years. IMHO resist the temptation.

MarkyMarkD

Cashbacks are not, as a rule, good value as Froggit has calculated, but in specific circumstances (such as paying off expensive debt) they may be worthwhile.

If you've got enough equity, though, it will be cheaper to get a standard five year fixed mortgage for the larger amount, and redeem the debts, and then make overpayments on the mortgage to get you back to the original mortgage size. That would mean choosing a mortgage which allows this level of overpayment, though.

Joe_Bloggs

You genuinely are mad. What rate are you paying now to even consider 6.49% ? What rate will your existing lender offer you ?
J_B.

MarkyMarkD

6.49% with a 6% cashback is equivalent to 5.29% over five years - it's not QUITE as mad as you think, Joe.

lovelldr

Froggitt wrote:

You can get a 5 year fix for 4.99%. You are paying about £1500 a year more interest with your Chelsea deal. Thats £7500 over 5 years. IMHO resist the temptation.

Where's the 5year fixed 4.99%? As our mortgage advisor has come up with an Alliance & Leicester 5.24% 5year fixed. Cheapest he found was Natwest 5.19%, but said that they are being a bit slower giving the mortgages, and so A&L would be better...

Would like to know where this mortgage is you're mentioning ...

Madaboutmoney_3

Wow that was a wake up call. I have just had a good look through my mortgage papers and the interest rate I am paying now is 5.6%, will go up to 6.25% in October. It was a self certified mortgage, I am part time, my husband is full time, didn't have enough salary to meet the 108k mortgage last year.

This year my husband has been promoted and now earns £21k, plus has earned about £4k every year in overtime, not guaranteed though. I earn £9k part time, get about £3k tax credits/child benefit, so hoping we have more of chance getting a 'normal' mortgage.

Throw any ideas at me please, thanks froggitt, joe and marky for replies so far. Hope this gives you a better picture.

lilyann1

I'd like to know where the 4.99% fixed is for 5 years too please.
I got 4.69% agreed over 3 years 3 months ago and the offer is due to expire,but as far as I have seen all the rates have gone up quite alot since then.

Joe_Bloggs

@MarkyMarkD or anyone.
How did you get to the 5.29% over 5 years ? Take a hypothetical example of a £100K @7% for 300 months, mortgage that gives 6% cashback, upfront fees are £500. How do you evaluate the rate over the end of the penaly period say 5 years or any period say n years. I ask in ingnorance of the underlying method. Is there a combination of excel functions that can work it out. I have tried IRR but it gives nonsence the way I'm using it.
J_B.

MarkyMarkD

Nothing clever like IRR, Joe.

Simply a 6% cashback over 5 years is equivalent (in non-discounted terms) to 1.2% per annum (=6%/5) so a 6.49% with a 6% cashback is equivalent to 5.29% without a cashback.

Discounting doesn't make a lot of difference, but actually makes the 6% worth slightly more than 1.2% pa - more like 1.4% in fact.

I work this out in Excel by using Goal Seek as follows:

Create a range of figures across row 1 as follows:

-6 +1.2 +$B$1 +$B$1 +$B$1 +$B$1

In B1 put =NPV(.05,A1:F1) where 0.05 (i.e. 5%) is an estimated discount rate.

Goal Seek with Set Cell: B1
To Value: 0
By changing cell: A2

This changes the annualised equivalent of the 6% cashback so that the NPV is 0, and gives the answer of c.1.4% and thus the equivalent rate for the Chelsea deal is only 5.09%.

All in all, the Chelsea deal really isn't that bad value, if you need the cash up front and don't mind being tied in for 5 years.

(If there are fees, you need to knock them off the cashback before doing the calculation).

Froggitt

lovelldr wrote:

Where's the 5year fixed 4.99%?

Saw it in last weekends papers but on moneysupermarket now theres Mercantile BS and Britannia BS