A lot of banks seem to be offering cash incentives at the moment to tempt you to jump ship from your current lender and refinance with them.
Sums of between $1000 and $4000 are being offered up for borrowers that could use some extra funds in their account, with the added bonus of switching to (at least what they think) will be a better deal.
But just because they throw you a wad of cash, it doesn’t mean you’ll be better off over the long term… or even the short term.
Why do banks offer cash?
These incentive deals, nicknamed ‘cashback loans’, but actually known as refinance cash rebates, usually pop up in a competitive market for lenders. Banks need your money on their books and in times like these, when interest rates are so low, more people than ever want to be paying off a mortgage. It is also a time of unprecedented disruption in the mortgage space. Online only banks, second tier lenders and financial startups are emerging for a slice of the market. So banks need to stand out from their competitors.
At some point, banks came to the conclusion that offering cash was a good incentive. Maybe borrowers would be low on funds at the moment due to the strains of COVID, or would like the opportunity to pay off a bit of debt, or even buy something they need without having to use credit.
The survey says yes… sometimes
A recent study found that one in three borrowers were planning to refinance in the coming months. Of these, one in four surveyed would choose a cashback offer over a low interest rate. One in three millennials would opt for cash, but just one in 10 baby boomers.
Overall though, nearly half of the borrowers surveyed (46%) would opt for the lower interest rate over a cash rebate.
The good news for borrowers at the moment is that you may not have to choose one option or the other, because you can now get cash rebates on loans that already have super low interest rates.
What you should use the rebate for
The whole point of a rebate is that it is there to cover the costs of moving loans to another bank.
And there are quite a few costs involved. You will incur such expenses as government fees for discharge of title, discharge of mortgage, title registration, costs of title searches, settlement fees and solicitor documentation fees. If you go ahead and break a fixed rate mortgage term, you will also incur early exit fees.
So if you do opt for a loan with a cash rebate, don’t start planning your next holiday or big retail purchase 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.
For your consideration
While the rebates are usually enough to cover the costs of switching lenders, the savings made 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. If you have a relatively small remaining balance on your loan, you may not qualify as it may not be worth their while to get you on board for a small amount only. Also, many of these deals are restricted to owner occupiers only, so if you are building an investment portfolio, you may not be eligible.
Independent financial advice will help you decide your best option.