What is mortgage cash back?
Can a mortgage cash-back put thousands in your back pocket?
Mortgage cash back is an incentive that banks use to entice new business. It is now common across major New Zealand banks, and is an upfront cash payment made to you for your business. The payment could be for new lending – such as if you’re a first home buyer or property investor – or existing lending should you decide to switch your existing mortgage between banks.
Cash back sums do vary, and they aren’t usually advertised by the banks themselves, so most of the time you won’t know what you’ve got until the mortgage application is processed. There are usually some conditions to be met, such as you promising to stay with the bank for three years and ensuring any salary you receive is paid into a bank account by that same bank.
A good cash-back offer may be an important factor when you obtain a mortgage. For example:
A sizeable cash back offer can often make any minor differences between mortgage rates irrelevant. To explore this further, let’s say a couple sought a mortgage for $500,000 over 30 years. The difference between a 3.6% and 3.65% one-year interest rate might seem like a lot, but if the couple could obtain a cashback offer of $4,000 the difference in mortgage rates is negligible. That’s because the difference in fortnightly repayments between the two rates would be just $6.44 per fortnight, or $167 for the full fixed-rate period. Best of all, after the three year period is over (the period the couple promised to stay with the bank in order to get the cash-back), they can seek-out another cash back offer with a different bank!
In the example above, if the couple just focussed on the interest rate alone, they might not realise the benefits of a good cash back deal. In many other cases, seeking out an attractive cash back offer can make a big difference, for instance;
- First home buyers. After putting nearly everything they have into a deposit, first home buyers may be financially stretched as they move into their first home. They’ll usually have a legal bill to pay for conveyancing the home, moving costs, and may need appliances or minor repairs on the home they move into.
- Existing home-owners. A homeowner with an existing mortgage may find it worth their while to see what else is on offer. Naturally, making any change would only take place when it makes sense to do so. The cost may be as minimal as some legal fees and paperwork to complete– however this can potentially be paid for from a cash back sum.
- Property investors. A property investor with a large sum of total lending may be able to secure a sizeable cashback by shifting lenders. This could make quite a difference to the net cash flow of the investment property or properties. As per the comments above for existing home-owners, changing lenders would only take place when it makes good sense to do so, as there are a few more matters to consider with property investment loans.
Drawbacks of cash back
One of the benefits of using a mortgage broker (mortgage adviser) is they can ensure your cash back is maximised as well as work out the overall financial benefit of cash backs and discounted rates versus any other costs. For example:
- Cash backs require that a customer stay with the lender for three-or-so years, otherwise the bank can claw it back off you. So, if your situation might change during that time – such as if you intend to sell the property – cash back might not be such a good idea.
- If you refinance within your cash back period, the bank will reclaim cash back paid to you. If you repay all your debt because you’ve sold your house, they are still likely to make you repay some or all your cash incentive. If, however, you only repay a portion and retain some of your lending with the bank, it’s unlikely they will ask you to repay the offer.
- Note: the repayment of cash back is a different factor to early break fees – which are calculated based on the remaining term of your fixed interest rate term.
- Mortgage cashbacks are now commonplace, but they’re not guaranteed and could easily be stopped.
- If you’ve got a small mortgage, the mortgage cashback offer will also be small.
- Deciding on the right loan, structure, and lender (bank) is a combination of many factors, and the cash back is just one part of that. It’ll pay to keep everything in mind when you’re obtaining a loan – focussing too much on the cash back (or interest rate) might disadvantage you in other areas.
How could you benefit
To see if a mortgage cash back might put thousands in your back pocket, it’d be our pleasure to help you with a complementary mortgage review. Leave your details below and we’ll be in touch within one working day: