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Home loan cash backs heat up, but are they worth it?

Home loan cash backs heat up, but are they worth it?

More than a dozen lenders are offering cash incentives for home owners willing to move their business to a new lender, with Suncorp Bank, Reduce Home Loans and 86 400 the latest to put cash offers on the table.

Suncorp Bank is now offering up to $3,000 to refinancers, plus an additional $1,000 for people working in essential services roles, such as doctors, nurses, teachers and police officers.

A total of 13 banks currently have cashbacks on offer, including three of the big four banks – CBA, Westpac and ANZ.

List of cashback offers on a $400,000 loan

BankCashbackTypeAdvertised rate
ANZ

$4,000

Refinance (brokers only)

2.72%

Suncorp

$2,000 or $3,000

Refinance

2.78%

Virgin Money

$2,500

Refinance

2.79%

CBA

$2,000

Refinance

2.79%

Westpac

$2,000

Refinance

2.93%

St George

$2,000

Refinance

2.69%

Bank of Melbourne

$2,000

Refinance

2.69%

BankSA

$2,000

Refinance

2.74%

People's Choice Credit Union

$2,000

Refinance

2.69%

RAMS

$2,000

Refinance

2.74%

86 400

$2,000

New customers

2.74%

Reduce Home Loans

$2,000

New customers

2.59%

MOVE Bank

$1,000

New customers

2.69%

Source: RateCity.com.au. Note: Suncorp is offering $2,000 for loans below $750,000 and $3,000 for loans above $750,000. Reduce is offering larger cashback amounts for loans over $1 million. See full notes below.

RateCity crunched the numbers based on someone refinancing their loan with $400,000 remaining to see whether they would be ahead or behind after picking a cashback special over one of the lowest rates in the market.

How much extra you would pay on average compared to going with one of the five lowest rate loans:

Extra paid compared to a low rate loan
BankCashbackAdvertised rateOver 2 yearsOver 5 yearsOver 25 years
ANZ

$4,000

2.72%

-$1,792$1,882$15,632
Suncorp (essential worker)

$3,000

2.78%

-$471$3,875$20,168
Reduce Home Loans

$2,000

2.59%

-$417$1,807$10,092
People's Choice Credit Union

$2,000

2.69%

-$178$3,161$15,644
Bank of Melbourne

$2,000

2.69%

$86$3,425$15,908
St George

$2,000

2.69%

$86$3,425$15,908
BankSA

$2,000

2.74%

$479$4,377$18,973
86400

$2,000

2.74%

$965$5,613$25,209
Suncorp

$2,000

2.78%

$529$4,875$21,168
Virgin Money

$2,500

2.79%

$798$5,616$24,733
CBA

$2,000

2.79%

$808$5,266$21,983
RAMS

$2,000

2.74%

$1,095$4,993$19,589
MOVE Bank

$1,000

2.69%

$1,272$4,611$17,094
Westpac

$2,000

2.93%

$1,709$7,737$30,444

Source: RateCity.com.au. Calculations are based on the interest paid, plus upfront and ongoing fees, minus any cashback offered. Full notes below.

Sally Tindall, research director at RateCity.com.au, said while low rate loans were usually more cost effective, the tide was turning as the bigger banks chase after new customers more aggressively.

“Cashback specials are nothing new. They’ve been used for years as a clever marketing tool to grab people’s attention. What’s changed is the banks are starting to offer cashback on loans that also have competitive rates,” she said.

“Someone who refinances every couple of years to a competitively priced loan could potentially come out on top by taking up a cashback special.

“However, over the long term it’s a completely different story. A low rate is almost certainly going to trump a one-off perk over 10 or 20 years – often by tens of thousands of dollars.

“While the promise of cold hard cash is hugely attractive for anyone juggling the bills, people who put the money back into their mortgage will see even bigger savings as it will reduce their interest charges every single day.

“It’s great to see Suncorp giving some extra cash to new customers who work on the frontline as a thank you for their service over this challenging time,” she said.

Before refinancing for a cashback deal – check:

  • Is the interest rate competitive (the lowest variable is 2.29 per cent and the lowest fixed is 2.09 per cent)?
  • Read the terms and conditions carefully to make sure you’re eligible for the cashback.
  • Are the fees high? (some banks charge no upfront or ongoing fees). Ask the new lender to waive them if there are.
  • Does the loan offer the flexibility you need? (like an offset account, ability to make extra repayments.
  • Are you in position to refinance? This may include having a steady job, having a good amount of equity in your home, etc.
  • Can you put the cashback bonus into your mortgage? Extra repayments help reduce your interest charges over the years to come.

Notes:

  • The calculations are based on the interest paid, plus upfront and ongoing fees, minus any cashback offered. Calculations are based on an owner occupier loan paying principal and interest with 25 years remaining and a balance of $400K. Calculations do not include discharge fees from current bank or government fees.
  • The lowest variable rate is an average of the lowest 5 variable rates on RateCity's database.
  • The bank rates are the lowest variable rates offered by each bank with the cashback offer. Some LVR requirements apply for certain rates. For Virgin Money the calculations do not include frequent flyer points.
  • Suncorp is offering $2000 cashback for loans between $250K and $750K. Refinancers above $750K get $3000 cashback. Suncorp is offering an extra $1000 cash back for essential workers including doctors, nurses, teachers, police officers, firefighters, state emergency service and defence force personnel.
  • Reduce Home Loans is offering $2000 cashback for loans under $1 million, $4000 for loans under $2 million, $6000 for loans under $3 million, $8000 for loans under $4 million and $10,000 for loans over $4 million. Reduce charges a higher interest rate (2.59%) when taking out the cashback deal than their lowest rate loan (2.29%).
  • Cashback and fees are not added to the loan balance.

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Fact Checked -

This article was reviewed by Research Director Sally Tindall before it was published as part of RateCity's Fact Check process.

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Learn more about home loans

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

How will Real Time Ratings help me find a new home loan?

The home loan market is complex. With almost 4,000 different loans on offer, it’s becoming increasingly difficult to work out which loans work for you.

That’s where Real Time RatingsTM can help. Our system automatically filters out loans that don’t fit your requirements and ranks the remaining loans based on your individual loan requirements and preferences.

Best of all, the ratings are calculated in real time so you know you’re getting the most current information.

What's wrong with traditional ratings systems?

They’re impersonal 

Most comparison sites give you information about rates, fees and features, but expect you’ll pay more with a low advertised rate and $400 ongoing fee or a slightly higher rate and no ongoing fee. The answer is different for each borrower and depends on a number of variables, in particular how big your loan is. Comparisons are either done based on just today or projected over a full 25 or 30 year loan. That’s not how people borrow these days. While you may take a 30 year loan, most borrowers will either upgrade their house or switch their home loan within the first five years. 

You’re also expected to know exactly which features you want. This is fine for the experienced borrower, but most people know some flexibility is a good thing, but don’t know exactly which features offer more flexibility than others. 

What is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

They’re not always timely

In today’s competitive home loan market, lenders are releasing new offers almost daily. These offers are often some of the most attractive deals in the market, but won’t get rated by traditional ratings systems for up to a year. 

The assumptions are out of date 

The comparison rate is based on a loan size of $150,000 and a loan term of 25 years. However, the typical loan size is much higher than that. Million dollar loans are becoming increasingly common, especially if you live in metropolitan parts of Australia, like Sydney and Melbourne. It’s also uncommon for borrowers to hold a loan for 25 years. The typical shelf life for a home loan is a few years. 

The other problem is because it’s a percentage, the difference between 3.9 or 3.7 per cent on a $500,000 doesn’t sound like much, but equals around $683 a year. Real Time Ratings™ not only looks at the difference in the monthly repayments, but it will work out the actual cost difference once fees are taken into consideration. 

What is an ongoing fee?

Ongoing fees are any regular payments charged by your lender in addition to the interest they apply including annual fees, monthly account keeping fees and offset fees. The average annual fee is close to $200 however there are almost 2,000 home loan products that don’t charge an annual fee at all. There’s plenty of extra costs when you’re buying a home, such as conveyancing, stamp duty, moving costs, so the more fees you can avoid on your home loan, the better. While $200 might not seem like much in the grand scheme of things, it adds up to $6,000 over the life of a 30 year loan – money which would be much better off either reinvested into your home loan or in your back pocket for the next rainy day.

Example: Anna is tossing up between two different mortgage products. Both have the same variable interest rate, but one has a monthly account keeping fee of $20. By picking the loan with no fees, and investing an extra $20 a month into her loan, Josie will end up shaving 6 months off her 30 year loan and saving over $9,000* in interest repayments.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Who offers 40 year mortgages?

Home loans spanning 40 years are offered by select lenders, though the loan period is much longer than a standard 30-year home loan. You're more likely to find a maximum of 35 years, such as is the case with Teacher’s Mutual Bank

Currently, 40 year home loan lenders in Australia include AlphaBeta Money, BCU, G&C Mutual Bank, Pepper, and Sydney Mutual Bank.

Even though these lengthier loans 35 to 40 year loans do exist on the market, they are not overwhelmingly popular, as the extra interest you pay compared to a 30-year loan can be over $100,000 or more.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.