Cashback or discount?

When should you take a cashback and when should you take a discounted rate?  The first step is to compare the IRR, so use the “Loan Comparator” spreadsheet.  If the calculations work out to be roughly the same (which they should if the lender has done its sums correctly), it is immaterial which scheme is chosen as far as value-for-money is concerned, so consider the following.

Take the cashback if you need to spend more money on the house, such as furnishings or home improvements generally.  

Take the discount if your income might be a bit strained for a period.  The reduced burden for a year or two might get you past the point when you get a pay rise.  The term of the discount should cover the period of anticipated income-squeeze.

If the IRRs differ, clearly the scheme with the lower IRR is the one to go for unless you have a particularly overwhelming need for initial cash regardless of the IRR. 

Interestingly, repayment mortgages score a slightly better on IRR than interest-only mortgages when initial incentives are involved.  This is because by the time the higher on-going rates kick in, the amount owing on a repayment loan is slightly lower, as some capital has been repaid.  Most lenders ignore this anomaly but for borrowers, choosing the repayment method in these cases will win them a little extra bonus.  Experimentation with the “Loan Comparator” spreadsheet will illustrate this.  The table below illustrates the differences between identical discounts and cashback equivalents for the interest-only and a 20 year capital repayment method.  The standard variable rate is 7.5% pa in each case, with monthly rests.

Discounted rate





and initial term

IRR (6 yrs)


IRR (6 yrs)


5.00% for 12 mths

7.237 % pa


7.202 % pa


6.00% for 24 mths

7.154% pa


7.121% pa


6.50% for 36 mths

7.174% pa


7.145% pa


6.75% for 48 mths

7.193% pa


7.177% pa



The difference is more marked the shorter the repayment mortgage term:  the term makes no difference to an interest-only mortgage.  Also note that some lenders offer a small cashback as well as an initial interest rate discount.

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