Eight straight rate rises from the RBA, all passed on by lenders, mean that most Aussie borrowers are now paying hundreds of dollars extra a month on their mortgages.
This adds up to thousands of dollars a year and tens of thousands for some people. While people are figuring out where to find all that extra money, the cost of living and inflation are making it harder. One way to find those extra dollars, and fast, is to refinance.
A number of lenders are offering cashback incentives for borrowers to jump ship from their existing banks. The home loan market is very competitive these days and, like any business, lenders need to attract customers.
One borrower in a recent news story saved herself $10,000 in the first year since refinancing, by combining a $4000 cashback incentive with a better loan deal that saved her the rest. That move alone basically offset all the extra pain that she would have experienced in one year from rate rises.
What are cashback offers?
Some lenders are offering between $4000 and $6000 as one off payments to borrowers that could use extra funds in their account, with the potential added bonus of switching to a better deal.
These incentive deals are nicknamed ‘cashback loans’, but actually known as refinance cash rebates. Banks decided at some point that a cash gift was the best way to win someone else’s customers, and now that higher interest rates are eating into borrowers’ cash stashes, they are likelier than ever to appeal.
The cash injection could help settle an outstanding bill, or buy goods without using a credit card and help defray the expenses for the refinance. But just because they throw you a wad of cash, it doesn’t necessarily mean you’ll be better off over the long term… or even the short term.
Best way to use it
The whole point of a rebate is to cover the costs of moving loans to another bank.
Expenses such as government fees for discharge of title, discharge of mortgage, title registration, costs of title searches, settlement fees and solicitor documentation fees. If you break a fixed rate mortgage term, you will also incur early exit fees.
So if you opt for a cash rebate, don’t start planning your next holiday without first covering off those costs.
Of course, putting that rebate straight back into your loan will save you even more when interest is taken into account.
Long term pain
The extra cash you get could dry up quickly if the loan is less flexible than your previous one, or if it doesn’t suit your specific needs. Lower interest rates add up to significant savings over the life of a loan, usually much more than a few thousand dollars’ worth.
Of course, not many people these days choose a loan and stick with it for the full term – you may change homes a number of times – so if you refinance regularly, you can make good use of the incentives on offer at any given time.
Before you do take the plunge however, make sure you read the fine print. Most lenders will have a minimum loan amount that qualifies for the rebate. Usually these deals are also restricted to owner occupiers, so if you are building an investment portfolio, you won’t be eligible.
Beware mortgage jail
The other thing to consider is that after all those rate rises, it is harder than before to refinance. There is still a 3% serviceability buffer in place, which means that if you are trying to refinance to a loan with a 5% rate, you will need to show you can service repayments at 8%. A lot of people will be surprised to see how far their borrowing power has fallen since April this year.
On average, it’s down more than 20%. Think of that for a moment. If you were eligible to borrow $1 million back in April, you’re now only eligible for between $750k and $800k. That’s pretty significant.
Reach out to Zinger
It’s best to arm yourself with the right information and education before trying to take the plunge and refinance.
The mortgage brokers at Zinger can help you figure out whether a cashback deal will be worth your while and which options you might be eligible for. They can also help you avoid hitting a finance brick wall down the track by signing up with loans that lock you in for long periods or make it too hard to access your equity.
