Refinancing cashbacks hit record high – but are they worth it?

There are now 34 lenders offering home loan cashback deals – a new record high, with deals for the average-sized mortgage of up to $5,000.

This is almost three times the number available at the start of the COVID pandemic, when refinancing was gaining momentum.

Analysis from RateCity.com.au:

• 34 lenders offer cashback deals, up from 12 in February 2020 (at the start of the pandemic).
• Deals range from $888 up to $5,000 for average mortgages. Note that Citi offers $6,000 via a broker for loans of $1m or more, while Reduce Home Loans offers $10,000 cashback on loans of $2m or more.
• Most cashbacks are for refinancers only.
• All four big banks are offering cashback deals.
  
  

With refinancing booming in recent years, cashbacks are an increasingly popular perk being offered by lenders to attract new business.

The latest ABS lending indicator figures show $17.93 billion worth of loans were refinanced in July, just below the June record high.

Source: ABS

Are cashback deals worth it?

RateCity.com.au compared the cashback specials from the big four banks on their lowest rates, compared to the lowest variable rate on the market at 3.74 per cent. The calculations are based on a typical refinancer (see assumptions below) and all rates compared factored in the September rate hike.

After two years, all of the big four banks’ lowest variable rates were more expensive than the lowest variable rate option, despite the cashback. This assumes the RBA lifts the cash rate according to Westpac’s forecasts and the banks pass it on in full.

Cashback deals – how do the big four banks stack up?

Calculations are based on a $500,000, 25-year loan.

Source: RateCity.com.au

Notes: Calculations are based on an owner-occupier paying principal and interest on a $500,000 balance with 25 years remaining. Assumes Westpac’s cash rate forecast and lenders pass on rate changes in full. Costs are based on interest paid plus fees, minus any cashback. Assumes cashback dollars are not used to pay down the mortgage.

However, RateCity.com.au analysis shows a borrower on the average existing owner-occupier variable rate, which is estimated to be 5.11 per cent by the end of this month, would come out ahead on all of the 34 cashback home loan specials. This assumes each lender passes on the 0.50 percentage point rate hike in full.

RateCity.com.au research director, Sally Tindall, said: “The refinancing market is swimming with sweeteners with the number of cashback deals hitting a new record high.”

“The rise in refinancing is prompting the banks to throw large sums of cash at the feet of anyone willing to switch. However, borrowers should be aware these deals can sometimes come at a cost,” she said.

“Free cash might be tempting, particularly at the moment, but unless you switch to a new loan with a competitive rate it could end up costing you thousands of dollars more in interest over time.

“You have to have your wits about you if you’re planning on playing the cashback game.

“If you find a cashback deal with a competitive rate and little or no fees, then it’s possible you could come out ahead. But this will depend on how regularly you refinance. If you’re someone who is more likely to set and forget your mortgage, you could be better off skipping over the cashback perks, and instead looking for a low rate.

“If you do choose a cashback deal, consider using it to pay down your debt. This will save you interest over time and provide some breathing space as rates keep rising,” she said.

Before refinancing for a cashback deal – check:

• Is the interest rate competitive? Under 4% will be a competitive variable rate for owner-occupiers, with about a dozen lenders expected to have a variable rate under 4%.
  
  
• Read the terms and conditions carefully. Make sure you’re eligible for the cashback.
  
  
• Are the fees high? Ask the new lender to waive them if they are.
  
  
• Does the loan offer the flexibility you need? This may include an offset account, ability to make extra repayments.
  
  
• Are you in position to refinance? This typically includes having a steady job, owning at least 20 per cent of your home and that you’re not currently on a fixed rate, as break fees may apply.
  
  
• Can you put the cashback bonus into your mortgage? Extra repayments help reduce your interest charges over the years to come. 
  
  
• Refinance regularly: Don’t set and forget your loan, especially if you are on a fixed loan, as potentially high revert rates may quickly eat away at any savings you’ve made.

Compare home loans in Australia