Lower rates or cash back incentives?

The competition for market share in the mortgage market has intensified with Bank of Ireland announcing they will double the amount of cash they will give to first time buyers, investors or people who move their mortgage to them.

The bank is now offering 2% cash back, of the value of the mortgage, with no strings attached to borrowers. The offer is limited to all mortgages drawn down before the end of this year.

The cash-back offer from Bank Of Ireland was 1% up until now.

So, if you were to borrow €250,000 from them, they will give you €5,000 in return.


The offer is not conditional on you taking out a fixed or variable rate offering either, the product you choose has no bearing on the 2% incentive.

Is it worth taking them up on this offer then? Well their variable rate for example is one of the highest in the market if the loan to value exceeds 80% at 4.5%. And when you compare this rate to other providers who are charging a lower rate of 3.9% the difference in monthly repayments assuming a mortgage of €250,000 over a 25 year period is c. €84 per month.

If rates stayed the same then the breakeven point when the €5,000 is used up to make up the difference in monthly repayments is at month 59 (€5,000/84)

So, whilst the lure of immediate cash is attractive particularly to first time buyers who might need the funds to furnish the property or replace savings used to gather the deposit, the long term benefit might not be assuming rates stayed the same over the mortgage term, for example, when you compare one lender offering cash back incentives with higher rates and another offering no incentives but lower rates, you find the following assuming a loan amount €250,000 over a term of 30 years:

Cash Back Incentive but Higher Rates

Institution: Bank of Ireland

Interest Rate: 4.5%

Total Interest Repayments: €216,016

Less Cash incentive of €5,000

Total collected by Bank of Ireland: €201,016
 

No Cash Back but Lower Rates

Institution: AIB

Interest Rate: 3.9%

Total Interest Repayments: €174,501

Less Cash Incentive €0
 
Total collected by AIB: €174,501

So, the question I guess here is can you do more with the €5,000 right now than you could with repaying €884 more each year than you need to for the next 30 years?