Cashback home loans soar since COVID-19 – but are they worth it?

There are now 29 lenders offering cashback deals of up to $4,000 for the average homeowner looking to refinance their mortgage – a new record.

This is more than twice the number available in February this year before the COVID-19 pandemic was declared.

Analysis from RateCity.com.au:

• 29 lenders are offering cashback deals, up from 12 in February (list at end).
• Deals range from $1,000 up to $4,000 for average mortgages.
• Most cashbacks are for refinancers only.
• All big four banks are offering cashback deals (ANZ through a broker).

With refinancing booming during COVID, cashbacks are an increasingly popular perk being offered by lenders to attract new customers.

The latest ABS lending indicator figures show 137,372 loans have been refinanced in the five months from April to August inclusive, with May hitting a record high.

Sally Tindall, RateCity research director, said the record number of cashback specials is an indication of the competitiveness of the refinancing market.

“The rise in refinancing is forcing banks to be more competitive than ever,

“Banks need to be winning new business, not losing it, and they’re throwing large sums of cash at anyone willing to refinance, particularly if they’ve got a good track record of paying down their debt and a steady job,” she said.

Are cashback deals worth it?

RateCity compared the cashback specials from the big four banks and their subsidiaries to the lowest rate options on the market, based on a typical refinancer (see assumptions at end).

VARIABLE:Big four lowest variable rates (+cashback) Vs lowest ongoing variable rate

• After 2 years: The cost of the Westpac, St George, Bank of Melbourne loans at this point were cheaper than the lowest variable rate loan.
• After 3 years: Only the Westpac loan was cheaper.
• After 5 years: All of the loans tested were more expensive after 5 years, despite the cashback.

FIXED: Big four lowest fixed rates (+cashback) Vs lowest fixed rate loans on market

• 2-year fixed: St George, Bank of Melbourne, Westpac, ANZ and NAB deals were all cheaper at the end of the 2-yr fixed period when the cashback was included.
• 3-year fixed: St George, Bank of Melbourne and Westpac were cheaper at the end of the fixed period.
• 5 year fixed: None of the big bank loans were cheaper, than the lowest 5-yr fixed rate, despite the cashback.
• All big bank loans tested were significantly more expensive after the fixed rate period finished if the loan rolled over to the revert rate.

RateCity research director Sally Tindall said, while most cashback deals were more expensive in the long term, the tide is turning.

“Banks are increasingly offering sign-up specials on their lowest rate loans, making them far more competitive than they used to be,” she said.

“While a low ongoing rate typically trumps a sign-up special over the longer term, if you’re someone who refinances regularly, and knows how to drive a hard bargain on rate and fees, you could end up ahead in the first couple of years.

“Don’t just assume you’ll be better off with a cashback special. Do the maths yourself to work out if the whole package is going to put you ahead or leave you in the red,” she said.

Before refinancing for a cashback deal – check:

• Is the interest rate competitive? Look for a rate starting with a ‘2’.
• Pick a loan that suits that your finances.
• Are the fees high? Ask the new lender to waive them if there are.
• Can you refinance? You’re likely to need a steady job and at least a 20% deposit or equity.
• Can you put the cashback bonus into your mortgage? Extra repayments help reduce your interest charges over the years to come.

List of lenders offering home loan cashback deals on RateCity.com.au

Source: RateCity.com.au. For home loans under $850,000. Reduce Home Loans offers higher cashbacks for larger loans. FHB = “first home buyers”.

VARIABLE RATES – Cashback deals Vs refinancing to the lowest rate lender

Source: RateCity.com.au. Notes below.

FIXED RATES - Cashback deals V refinancing to the lowest rate lender

Source: RateCity.com.au.

Notes: Based on an owner occupier paying principal and interest switching 5 years in to a 30-year loan with a $400,000 balance. Rates are for an LVR of 70%. Costs are based on interest paid plus fees minus any cashback. Refinancing fees do not include discharge fees from the old lender or government fees. Assumes cashback dollars are not used to pay down the mortgage. The lowest 3 year fixed rate includes a cashback of $750.

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