It’s been a while since The Steve Miller Band first sang ‘Take the money and run’ but it’s a conundrum increasingly faced by homeowners today.
More and more lenders are offering cashback to borrowers who choose to refinance their home loans with them. And research suggest it’s a significant inducement.
Builder Ben Kohonen, 34, wife Emma, 40 and children Quade, 8, and Abbie, 6, recently refinanced their home loan to save. Their interest rate has gone from nearly four per cent to 1.89 per cent. Photo: Tim Pascoe
MORE: Home values hit record highs
Regions leading our property boom
According to a survey by comparison site Finder, one in four homebuyers would prefer a cashback offer instead of a low interest rate. Males – 34 per cent of those surveyed – are more than twice as likely than females to take the cash rather than a long-term saving on their loan.
But don’t grab that money so soon. It might come back to hurt you in the long run.
And there is the option of playing both sides of the fence.
“Cashback offers can more than cover the costs of refinancing to a new home loan and put more money in your pocket,” Richard Whitten, senior property expert at Finder said.
“With cashbacks ranging from around $1,000 to $3,000 it’s not a small amount of money.
“If your loan comes with an offset account you can simply stash the money there and offset your loan principal while still having access to the money if you need it.”
Like most things in life, the offer comes with a but.
“A few thousand dollars is a tempting offer but borrowers need to make sure the loan they’re applying for is a good deal and a suitable loan for their needs,” Mr Whitten said.
“A loan with a lower interest rate will usually save you more money in lower repayments in the long run.”
CEO of Smartline personal mortgage advisers Sam Boer said it is vital borrowers comprehensively weigh up their own personal circumstances when considering between the cash and a lower interest rate.
“If the loan is competitive and it is the right loan for your circumstances (and it doesn’t lock you in for any length of time) you could take out the loan and immediately benefit financially from the cashback offer,” he said.
“However, it’s important borrowers remain proactive with their loan and keep an eye on other loan offers on the market.
“Cashback offers can look like a good idea but if the rate isn’t competitive, if the loan carries more fees or if money saving features aren’t available (such as an offset account or extra repayment facility), you can end up being worse off financially after a year or two.
“A significant cash lump sum is always an appealing prospect so it’s a good way for lenders to draw in new customers.
Smartline chief executive Sam Boer.
“Some people may take out the loan with the intention of refinancing later if the loan rate or fees are no longer competitive, but the reality is that many people don’t get around to it. “Meanwhile, they may be paying a higher rate or higher fees than they need to be, year in year out. Alternatively, people may know they need to refinance but consider it too hard or time consuming so they put it off.”
The smart money
This is a key reason why lenders offer cash inducements.
“Lenders know this and that’s why they use these methods to attract new customers – they usually end up getting the money back over time through fees or higher rates,” Mr Boer said.
“This is where a mortgage adviser can help as they take a lot of the admin, stress and hassle out of refinancing. Mortgage advisers are also legally obliged to act in the best interests of their clients through the new Best Interest Duty legislation, so you can rest assured your adviser will be objective when choosing the loan that will suit you most.”
According to the Finder survey of 1004 Australians, 46 per cent of those questioned would still prefer the benefit of a slightly lower interest rate on their mortgage. The research also found that one in three Millennials would prefer a cashback loan, compared to just one of 10 of Baby Boomers.
Younger generations like Maddy Hall, 24, and partner Sam Walters, 23, who purchased their first house and land package for about $650,000 are more likely to take the cash if they refinance. Picture: Mark Stewart
“Potentially, young people may have more desire for cash in hand as they may want to use it immediately to purchase something,” Mr Boer said.
“Typically also, younger people don’t have as much experience with borrowing, so they may not be fully aware of the long term financial implications of the various loan options available.”
MORE: DIY explosion comes with a warning
Secrets of our most popular homes
In proof it is a big issue facing many Australians: a separate Finder study found that 34 per cent of respondents were planning to refinance their mortgage over the next 12 months.
Either way, borrowers are in a good position.
“The home loan market is very competitive and there are so many lenders now, including many newer digital-only players,” Mr Whitten said.
“Interest rates are low across the board, including with the Big Four banks. This is a big part of the reason for cashback offers. It allows some lenders to offer a further incentive in a crowded market.
“Banks want borrowers’ business. It’s no surprise that cashback offers typically come on package loans and are offered to refinancers who switch from competitors.
The approach you take should depend on your own personal circumstances, Picture: Mark Stewart
“Banks know that most borrowers don’t switch. If they can get you in the door with a generous cashback upfront, and offer you a credit card and a bank account in addition to your loan, they’ve likely landed a customer for the long term.”
MORE: Where mortgage stress is hitting hardest
Why first homebuyers are dominating the market
“While borrowers need to compare loans from across the market, a big part of the decision comes down to which lender will accept your application and make it easy for you.
“Responsive, quality customer service helps borrowers make a decision here.”
Do the maths
Mr Whitten puts forward this hypothetical scenario for those looking at refinancing to understand whether the cash or a lower interest rate might be best.
“Let’s say we have two similar borrowers, both on 30-year home loans borrowing $500,000,” he said.
One has an interest rate of 2.10 per cent which is quite competitive. The other rate is a little bit higher at 2.50 per cent but comes with a $4,000 cashback. Both loans have no fees.
“The 2.10 per cent loan would have a monthly repayment of $1,873.
“The 2.50 per cent loan, meanwhile, would have monthly repayments of $1,975. That’s a difference of $102 a month, or $1,224 a year.
“Over the first four years of the home loan, the savings from the lower rate would add up to $4,896, more than the cashback offer.”
No better time than now
If you are considering refinancing, now is as good a time as ever.
“The New Year is a good time for Australians to review their spending and start planning for how they will manage their finances in the year ahead,” a Westpac spokesperson said.
“There was a rise in the number of homeowners refinancing their mortgage last year and we expect to see more Australians looking to take advantage of the continued low interest rate environment in 2021.
“A competitive mortgage market at the moment means there are lots of offers available such as cash back incentives for those thinking about a switch, as well as special deals and interest rates for prospective buyers.
“We would encourage customers to conduct thorough research and consult an expert to understand what options might be best suited for them.”
