Cashback offers

What the ACCC found

The ACCC looked at cashbacks in its 2019–20 home loan price inquiry. Its final report says that over the first half of 2020 several lenders offered cashbacks of between $1,000 and $4,000, depending on the lender. These are 2020 figures, recorded as history, not a guide to offers now. It describes the offers as paid by the new lender to the borrower, and aimed at covering some or all of the costs of refinancing. It also records that the Reserve Bank had noted the offers were consistent with the rise in refinancing from March 2020.

Two words in the ACCC’s description are worth holding on to. The cashback is for refinancing an eligible home loan, which implies the offer has conditions, set by the lender. And it is paid for moving a loan from an existing lender to a new one.

The same tool, used to keep a borrower

Cashbacks are not only a new lender’s tool. The ACCC found that after a lender receives a request to discharge a loan, it typically tries to persuade the borrower to stay, for example with a lower rate, a cashback or frequent flyer points. It also recorded what three stakeholders told it: that an existing lender may use short-term incentives, such as cashbacks and temporary discounts, to keep a borrower, even where those incentives save the borrower less over time than the new lender’s price would.

The ACCC’s explanation of why such incentives work is a plain one. Many people, it says, show “present bias”: they over-value small gains now compared with larger gains later. A cashback is paid once and soon; a rate difference is paid, or saved, every month for years.

Weighing once against every month

Moneysmart lists the fees and charges to compare before switching, in this order: a break fee on a fixed-rate loan, a discharge or termination fee to close the current loan, an application fee for the new one, a switching fee for moving to a different loan with the same lender, and stamp duty, which it says may apply and is worth checking with the lender. Set against a cashback, they fall into two columns.

The right-hand column is where a cashback can be outweighed. ASIC’s 2021 advice put it as doing the maths so the offer still leaves the borrower ahead in the long run, considered against the loan’s other parts, such as its rate and fees.

Loan term after a switch

ASIC’s 2021 tips, in the same breath as the cashback point, warn that a borrower who switches lenders “may end up with a longer term loan”. That cost sits in the right-hand column above. Moneysmart’s switching page makes the link to interest: every extra year a loan runs adds to the interest paid, so the length agreed for the new loan, measured against the years left on the old one, belongs in the comparison.

Doing the sums with a borrower’s own figures

Moneysmart’s mortgage switching calculator is built for this comparison. It shows whether switching would save money and how long it would take to recover the cost. Its stated assumptions: it adds up-front fees, such as an early termination fee, an application fee and other switching costs, to the loan at the start; and where an introductory rate is entered, it holds that rate for the introductory period and then recalculates repayments at the ongoing rate. Moneysmart calls its results a model, not a prediction.

Next: the ACCC’s price inquiry. Back: the serviceability buffer, or the six pages.