Are cashback deals worth it?

Cashback deals are still a popular perk offered by lenders to encourage people to move their mortgage over to them.

The RateCity.com.au database shows there are currently 12 lenders offering cashback deals, which might be far cry from the peak in March 2023 when there were 35 lenders offering these sweeteners, but the list still includes deals from big four bank ANZ and Westpac subsidiaries St George and Bank of Melbourne.

The cashbacks on offer are usually around $2,000, although they can change depending on the size of your loan, or the rate you’ll be on. Once your loan is settled, cashbacks are typically deposited into a linked transaction account for you to use how you see fit. For a full list of cashbacks available, you can check out the list here.

While the idea of pocketing a couple thousand dollars for switching your mortgage might sound appealing, it’s important to understand there are a number of different factors that go into choosing a loan - and what might seem like a sweet deal up front, could actually turn out to be sour, by having you pay much more in interest than another loan, without the cashback, may have.

How do cashback deals stack up?

RateCity.com.au compared different refinancing scenarios to see how the cashback deals on the market stack up both in the short and longer term.

Based on a $500,000 loan with 25 years remaining, we looked at:

• switching to the lowest rate available on the RateCity.com.au database;
• switching to the lowest rate available with a cashback deal; and -
• switching to the lowest rate available with a big four bank and cashback deal.

For each scenario, the research team factored in switching costs, which includes discharge fees, government fees and all compulsory fees charged by the new lender.

The results

Based on a $500,000 owner-occupier loan with 25 years remaining

Cost indicates total interest paid and fees

Source: RateCity.com.au. Includes switch costs. Uses Westpac cash rate forecast and assumes banks will pass cuts on in full.

The winning combination is a competitive rate and a cashback deal. However, the next best option doesn’t include a cashback at all, but at that rate, comes off far ahead of a big four bank offering $2,000 for you to switch.

This shows that even with a cashback, if your rate isn’t competitive, it’s going to cost you more in the long term.

What is a competitive rate?

Right now, a competitive rate is anything under 6 per cent. The RateCity.com.au database shows there are over 25 lenders offering these rates - but they do require a substantial deposit.

To get an understanding of the lowest rates for your deposit size, you can check out our list here.

So what should you look for if you want a cashback?

Every single borrower’s circumstances are different, but spending a bit of time to work out how each scenario could stack up for you is important to know if the decision you make could seem like a good one for now, but maybe not for later.

While a cash sweetener could be exactly what you need - perhaps to help with some DIY or a project in the house - the interest rate you pay on your loan will ultimately have the biggest impact over time, so make sure you’re happy with it.

Before refinancing for a cashback deal – check:

• Is the interest rate competitive? Spend a few minutes comparing similar loans with other lenders - is the rate you’re looking at the best you can get?
• Read the terms and conditions carefully. Make sure you’re eligible for the cashback. Often the deal can be only for certain loan sizes, or borrower types.
• How much are the fees? If they’re too high, you can always ask the new lender if they can waive them.
• Does the loan offer the flexibility you need? This could be an offset account, or the ability to make extra repayments.
• What are the limits to how you can use your cashback? Putting it straight back into your mortgage is the best way to help reduce your interest charges over time.
• You should aim to refinance regularly - as you pay off your mortgage and increase your equity, your borrowing position increases which means you may be eligible for lower interest rates with a refinanced loan.

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