Mortgage cashback: when 'free' money can be costly

Low-interest rates mean there are some great mortgage deals out there, but working out which one is best for you is getting even harder. Comparing mortgage deals is becoming increasingly complicated as lenders throw in sweeteners and deals in an effort to lure you in.

The latest so-called deal is cashback, with lenders such as HSBC, Clydesdale and Yorkshire Bank offering up to £1,500 to successful applicants. It's a hugely appealing offer, particularly to first-time buyers who see that cash and think about the furniture their new pad is going to need. But, do your homework before you apply. You may find you will be more than £1,500 worse off if you choose that mortgage over another.

That is because these deals tend to have stings in their tale in the form of inflated fees or a far from competitive interest rate. For example, Yorkshire Bank are offering £1,000 cashback and no fees on several of its mortgages this month. If you were to take them up on their offer and take out their three-year fixed mortgage at a rate of 3.59 per cent you would pay £27,295 over three years on a £150,000 mortgage. In contrast Chelsea Building Society has a three-year fixed deal with a rate of 1.99 per cent and a £1,845 fee. Over three years the Chelsea mortgage would cost £2,500 less than Yorkshire Bank's mortgage.

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If you see a mortgage that comes with added incentives like cashback think twice before applying. Are those gimmicks hiding a bad deal?

Even without gimmicks mortgages are hard to compare. You need to look beyond the headline interest rate and factor in the effect fees will have on the overall cost too. For this reason the lowest interest rate isn't always the cheapest deal. For example, Clydesdale Bank is offering a rate of 2.19 per cent over five years with a £999 fee. In contrast, Tesco's rate for a five-year fix is 2.59 per cent but the fee is just £195. Someone with a £150,000 mortgage would save £1,000 with the Tesco mortgage.

In order to make sure you get the best deal you need to use a good comparison tool. I'm a big fan of Moneysavingexpert.com's mortgage comparison calculator – I've used it for all the sums in this article – you can put in the details of two different mortgages, plus the fees, and it will show you how much each will cost over the length of the fixed term.

It may seem like a hassle finding deals, hunting for the fees then tapping it all into another website but the savings run into the thousands when you find the best mortgage. With lenders making it increasingly difficult to weed out the best deals with cashback and a variety of fees it's really important you know how to compare like with like and do so before choosing an offer.

So make sure you look at the fees, ignore cashback offers and use a comparison calculator to see exactly what the mortgage will cost you over the length of the deal.