Lenders are offering cashback deals of up to $10,000 to entice refinancing borrowers to move their mortgage but experts are calling on Australians to do the maths before making the leap.
Cashback deals and introductory rates can “hide” the real cost of loans, says RateCity head of research Sally Tindall.
The RateCity database shows 33 lenders offering cashback deals ranging from $2000 to $10,000, with that rate offered by non-bank lender, Reduce Home Loans.
Lenders are also trying to appeal to shopping borrowers by offering frequent flyer points, loyalty discounts, repayment breaks and free NBN.
“With the value of refinancing at a near record high, the market is awash with perks such as cashback offers in a bid to attract new customers,” said Ms Tindall.
“[However] people who are prone to setting and forgetting their home loan should be wary of shiny one-off perks that work in their favour but only in the short term.
“Borrowers saddled with massive mortgages are likely to find a low rate trumps a one-off perk like a cashback, potentially within the first two years.”
For example, a borrower considering Westpac’s Flexi First home loan, which offers a relatively low 4.89 per cent rate, may also find the $3500 offer appealing.
According to RateCity calculations, a borrower with a $500,000 loan who switched and took the cashback, would pay $46,767 in interest and fees after the cashback over two years.
But if they’d switched to a lender with a low variable rate of 4.74 per cent, they’d pay a higher $48,751.
However, by the third year, the same borrower would have been $656 better off by switching to the low-rate offer, over the slightly higher rate with the cashback.
Similarly, a borrower with a $1.5 million loan would be ahead in the first year if they took out Westpac’s basic loan, but by the second and third years after refinancing, they would have been better off taking the lower rate.
Mortgage broker and director of Pink Finance Nicole Cannon described banks’ use of cashback deals as a sales and bargaining tool as “quite problematic”.
She said cashback deals were first introduced to help cover the costs of refinancing, and were initially around $1000, but they’ve since increased and may be encouraging borrowers to switch lenders so often that it affects their credit score.
She said borrowers generally shouldn’t be looking to refinance more than every 12 months, in line with an annual review.
However, within that 12-month period, it may still be worth using rival lenders’ cashback offers as a way to negotiate a lower rate with your current bank, she added.
“If a customer comes to us within the 12 months, we are doing pricing with their existing bank. Depending on what that price is, some of them are pricing back to new-to-bank rates,” she said.
“We’re saying to the banks, ‘Customers are looking to us to refinance, they’ve seen this rate with a $4000 refinance rebate, can we get your new-to-bank rate?’”
Ms Tindall said the worst thing a borrower can do, is nothing, particularly if they haven’t haggled recently.
“After each RBA hike, lenders typically pass on the increase to both new and existing customers, however, since the first hike back in May of last year, over 40 lenders have gone on to cut variable rates, at least once, for new customers,” she said.
“This includes all four big banks. So while the majority of existing variable rate customers will have seen their interest rate rise by 3.25 percentage points since May of last year, many borrowers willing to refinance have been able to reduce the severity of the hikes.”