Should borrowers take advantage of home loan cashback offers?

Lenders are selling hard

These days lenders have been aggressively competing on market share by offering up to $3000 cashback for new borrowers and refinancers. Cashback specials are nothing new. In fact they’ve been used by lenders for years as a clever marketing strategy to grab people's attention. You choose a loan with a different lender and they promise cold hard cash deposited into your bank account when the loan settles to cover switching costs. But is it your friend?

Why do people fall for it?

According to the Australian Finance Group (AFG), seven out of ten borrowers are ‘Upgraders’ seeking finance to improve their home or the location of it or ‘Refinancers’ who want to reduce household costs and take advantage of lower rates. 

It seems the banks can see our blind spots to our relationship with money. A cashback reward program is hugely attractive to these customers who are looking for short-term gains or immediate cash flow, especially during an economic crisis triggered by COVID-19.

It works on the principle of urgency, cash backs are usually offered for a limited time, specifying that you have to apply by a certain date and have the loan settled by a certain date. Then your FOMO kicks in. That’s exactly why lenders capitalise on this behavioural phenomenon. 

This marketing strategy encourages customers to take advantage of the “free money” and feel good about being a “smart consumer”. But most people aren’t prepared for the miserable trap that is paying off high interests and fees. 

BE MINDFUL

Do you know that it may cost you six times more than you actually save? An exclusive analysis shows that borrowers of $1 million who accept a cashback from the big four bank lenders could end up paying an additional $7,300 to $12,000 over the first three years of the loan. 

Here’s a refinance with CBA on Canstar:

• Loan value: $1 million
• Loan term: 30-year principal
• Fixed interest rate for three years at 2.19%
• Cashback offer: $2000

Borrower ends up paying an extra $11,699 at the end of the term compared with a borrower on the lowest rate of 1.79%. 

“Many borrowers taking the cashback are only getting the equivalent of one month’s mortgage repayment on a 30-year loan. They’ve got to remember there are another 359 months to go,” says Steve Mickenbecker, Canstar’s group executive for financial services.

You may not realise it can be a package loan so you also get a credit card, an offset account plus home insurance policy and other fi