Top Mortgage Loophole

MSE_Martin

Update note: 6 September 10.15am. Offer Closed

This mortgage has now run out of funds. I do hope MoneySavers grabbed the loophole while it was available. Obviously this had very high demand (unsurprising) and used itself up quickly.

If you're not on the weekly email list then adding yourself will make sure you hear about these type of loopholes as soon as it happens. The email is free and has no ads to join the distribution list go to www.moneysavingexpert.com/tips

If you're still looking to remotgage, then read through m'free printed guide to remortgaging. This will quickly help you understand all the terms above, and give you a much better grounding for how this works.

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The original text is below for info.

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This is a major loophole worth possibly thousands (only for those in England & Wales I'm afraid) if you've got the right circumstances.

BEFORE YOU START

It is a bit complex, so if you don't get it see the 'what to do if you're not a mortgage nerd' bit at the end for how to get free help. The one warning is this is likely to be closed soon.

I'm going to send a special 'heads-up' email about this (if you're not on the weekly e-mail list, then you should be, it's free has no ads and makes sure you don't miss things like this or any other shopping or financial loophole - add youself to the distribution list here, view past tips here) and I suspect people who react quickly will be able to get it - others may find it closed very soon.


Quick Note On the Formatting Of This

If this is your first time to the site, don't be put off by the relatively scrappy nature of the formatting. This is the Chat Forum, not the main site, which is the normal venue for articles. I have written this here as it's likely to be very short lived and need fluid changing and it's easier to do here.

THE BASICS

The Loughborough Building Society is offering a 7% cashback mortgage (ie it will give you 7% of the value of the mortgage in cash when you get it out up to a max of £10k) at the moment (see here).

The rate itself isn't that hot, it's 6.1% and you're locked in for three years. However if you incorporate the value of the cashback into the mortgage it is effectively a discount rate at 3.77%.


The Loophole

This mortgage allows penalty free overpayments. In other words you can pay back as much as you like whenever you like. This allows you to do something very clever if you've some equity in your house.

Simply borrow more than you need to get the maximum cashback and then repay it the next day.

An Example To Explain

House Value: £160,000
Outstanding Mortgage: £50,000

Rather than just remortgaging for £50,000 you remortgage for £143,000 so you get the maximum £10,000 cashback (the max you can borrow is 90% of the house's value).

Then the next day, you repay £93,000 back to the mortgage, so your total debt is only the £50,000. You've now got a 6.1% mortgage and £10k cashback.

However in real terms this means you've got a discount mortgage at an effective rate of 3.77% (counting £3,500 cashback towards the actual mortgage) and an extra £6,500 in cashback on top!

This is a cracking loophole. Though you need to be careful you go through it correctly.


Who's this for?

This deal works well for people first of all with mortgages less than £160k. However it's best for people with outstanding equity and an earnings multiple which will get them a mortgage of around £150k, but who owe less than that (e.g. the example I gave).

WHAT TO DO IF YOU'RE NOT A MORTGAGE NERD

Mortgage nerds will understand this no problems, and easily work out how to play the game. If you're not, I suggest you do a few things first. This may not be the very best mortgage for you, as it isn't suitable in everyones circumstance.

A. Read through m'free printed guide to remortgaging.
This will quickly help you understand all the terms above, and give you a much better grounding for how this works.

Instantly Download a Free PDF Version
Order a Free Printed Version

B. Then get free no-cost inmpartial help

Then read it and in the short term read "How To Get Top Mortgage Advice For Free". London & Country mortgages (fees free no charge whole of market broker, see article for pros and cons) is aware of this offer and the loophole, so it should be able to help you through it.

Martin

UPDATE: Some more, technical, Q&As

First of all I can't stress enough that the notes above on where to get help are what you should be doing if you don't understand this. However for those who are almost there, let me try and answer some of the questions that have been posed below.

1. Where does the 3.77% discount rate come from?

It's worked out like this.

The normal rate is 6.1% for the first three years (not particularly cheap), yet you get 7% cashback. Now as you must stick with it for three years, you then divide the cashback over the three years - which is 2.33% a year (7% divided by 3).

So take the 6.1% interest rate then take the cashback off and you get a 3.77% rate.

In other words if you got a 3.77% mortgage over three years, you'd pay the same as you'd pay with this mortgage after you take the cashback into account. However that ignores the loophole cash.

2. How do I work out if this is any good for me?

Well this is a rule of thumb guide, so be careful.

First gain the right info

a. Work out how much you really need to borrow? Ie what is your outstanding mortgage?

b. Work out the maximum you'll be allowed to borrow. This will depend on how much your house is worth (one limit) and also a multiple of your earnings (another limit) (roughly 3.25 times a single person's or if it's a couple, 2.5 times the combined earnings)

c. Look at the fees for remortgaging. Expect rough fees of between £400 and £800 depending on the size of the mortgage (I'm assuming you have no redemption penalties (lock-ins), that will normally quash any remortgaging gains, though you may want to do the sums anyway)

d. Work out your new monthly cost. Go to the BBC's mortgage calculator (I think I'm going to get my own for this site) and put in the amount of your outstanding mortgage at an interest rate of 6.1%. This will give you your monthly payments compared to what you are doing now.

e. Work out the cashback you will gain. This will be 7% of the maximum borrowing amount (up to a limit of £10k which is a borrowing of £143,000).

Now let's find out how this stacks up

1. Work out your new cost over three years.

To do this multiply your 'new monthly cost' by 36 and add the fees you'll need to pay and then take the cashback you will earn away from it. It is possible in extreme circumstances, that at this point you will be left with a negative number. Don't worry about this - that literally means you'll be paid to take the mortgage.

2. Then take away the cost of your existing mortgage.

If the number is a negative one, you're onto a winner. If it's positive it's not worth it.

Thefunkygibbons

Will this last enough for it to be done?

Surely they will plug this pretty quick

Howdie

"Rather than just remortgaging for £50,000 you remortgage for £143,000 so that you get the maximum £10,000 cashback. "

"Then the next day, you repay £93,000 back to the mortgage, so your total debt is only the £50,000. You've now got a 6.1% mortgage (but the cashback you got means its the equivalent to 3.77% variable) plus an extra £6,500 in cashback!"


Martin, I thought that the whole point of borrowing £143k was to get £10k cashback why is this amount £6.5k in the latter part of your example??

photome

Howdie wrote:

"Rather than just remortgaging for £50,000 you remortgage for £143,000 so that you get the maximum £10,000 cashback. "

"Then the next day, you repay £93,000 back to the mortgage, so your total debt is only the £50,000. You've now got a 6.1% mortgage (but the cashback you got means its the equivalent to 3.77% variable) plus an extra £6,500 in cashback!"


Martin, I thought that the whole point of borrowing £143k was to get £10k cashback why is this amount £6.5k in the latter part of your example??

It is am extra £6500.....plus the £3500 for the initial £50,000

witteringFool

Looks like this has been plugged already (if you plan to not keep the mortgage at least):

An early repayment charge equivalent to the value of the cashback is payable if the loan is repaid in full within the first 3 years. The early repayment charge will be waived if the borrower(s) takes out a replacement loan with the Society or dies before the end of the mortgage term.


And just my luck - England and Wales only. Not for us Scots then.

SimplyAUser

I posted the following earlier and now I take my words back. This mortgage rocks.


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I am a first time buyer.... and this loophole is not suitable for me...
I found a house for £200,000 and if I exclude 10% deposit, I will be taking a mortgage of 180000.

If I got the mortagege from LBS, I will get the maximum of £10,000 back.
Calculate the cost over 3 years...
Without cashback the interest that I will pay = Principal * Rate * Time / 100 = (200000 * 6.1 * 3)/100 = £36,600

After cashback, total interest will become = 26,600
Now if I try to find effective rate of interest = (Total Interest*100)/(Principal *Time)
Effective rate of interest is = 26000 * 100 /(200000 * 3) = 4.34%
However Halifax are already offering a rate of 4.29 fixed over 2 years...
I do not think it is very lucrative for a first time buyer taking a mortgage over £160000 ..... Any comments

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(Martin, My apologies for this confusion )

OK. Now I have used the different mortgage monthly payment calculators to calculate total cost over 3 years when ideally you should switch your mortgage.

Using Halifax 4.29% mortgage (it is fixed for 2 years but for extreme comparison, I assume that it is fixed for 3 years)


Total Cost =36 equal payments of 989.83 = £35633.88
(I used the BBC mortgage calculator ... here )

Using LBS 6.1% mortgage + cashback of £10000 (there are some more petty costs involved not more than £300). check their website for more details


Total Cost =36 equal payments of 1184.57 - Cashback= £42644.52-£10000=£32644.52


So there is a saving of about £3000 to be had even for the first time buyer looking for a mortgage of £180000

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I calculated the limit when LBS starts to trail off ... A mortgage of over 250000 is the limit when even the £10000 cashback does not make any difference.

I hope this helps.

sc52

hi witteringFool,

would it still work if you repay everything bar a small amount - say £100

SC52

Alonso14

Seems good to me

irishjohn

An early repayment charge equivalent to the value of the cashback is payable if the loan is repaid in full within the first 3 years. The early repayment charge will be waived if the borrower(s) takes out a replacement loan with the Society or dies before the end of the mortgage term.

if you don't repay the loan IN FULL there won't be a repayment charge. This is why Martin recommended borrowing 143K and paying back 93K - so just make sure you don't repay it in full within the first 3 years

beefster

witteringFool wrote:

Looks like this has been plugged already (if you plan to not keep the mortgage at least):

An early repayment charge equivalent to the value of the cashback is payable if the loan is repaid in full within the first 3 years. The early repayment charge will be waived if the borrower(s) takes out a replacement loan with the Society or dies before the end of the mortgage term.


And just my luck - England and Wales only. Not for us Scots then.

Even if you repay the cashback..... 3.77% is a good rate, plus the interest made on the cashback? Does this not make it worthwhile??

Bennifred

That's fantastic! If only I wasn't on a fixed rate already........... :rolleyes: