Cashbacks, cash contributions, cash rewards, cash, cash incentives or first home bonuses: these all sound wonderful but as always, caveat emptor “let the buyer beware.” A cash reward is nice to have, but it’s not the sole basis on which to choose a lender.
None of us is going to pretend that banks give away money just because they’re feeling kindly. Banks are not known for their generosity, and they are in the business of making money, so why would they offer you cash back and what exactly does getting this ‘free money’ entail?
Well firstly, “There ain’t no such thing as a free lunch” (TANSTAAFL). Cash back offers from banks do come with hooks, as you would expect, so the question is: are there any advantages for you?
What is a cash back offer?
Banks will offer potential borrowers cash back as a way to lure them to take out a mortgage with them. Often as not, the interest rates offered by some of the more major banks won’t be as competitive as some of their smaller counterparts, so they will offer borrowers a certain sum or percentage of their mortgage back if they take out a home loan with them. They then pop this into the borrower’s bank account after they have drawn down the loan to buy a home or transferred existing home loan so they can do with it as they wish. Or can they?
How much cash will I get back?
That is the million-dollar question. Like most things with banks, the bigger your deposit and the less of a credit risk you are viewed as being or the larger your home loan, then the bigger and better you can negotiate your cashback to be. And that is the key. With offers such as these, you need to show the bank that you know that they exist, that you’re informed and that the amounts are negotiable. And therein lies the beauty of using a mortgage broker. They can do all that for you. They can negotiate in your favour, particularly if you already have a solid deposit behind you.
Current cashback offerings
Some of New Zealand’s larger banks are currently offering 1% of the value of a new home loan or up to $20,000 back to borrowers for limited time only, which seems generous, but the offers obviously come with caveats. So, before we explore the cost benefits of these cash rewards, let’s look at some of those caveats.
The strings that come with free money
One of the strings attached is that banks add a claw-back period of three or four years. Banks don’t lose money on such deals, and their aim is to keep you as a client. Most banks, therefore, stipulate that you’ll need to stay with them for a set period of time. As long as you don’t refinance your mortgage or pay it off completely within that period, you get to keep the cashback. If you were to refinance – maybe buy a new house, change lenders, pay off your debt or sell – then they’ll take either a percentage or all of it back. To avoid a nasty surprise if there is a change of plans, you must fully understand the fine print. Nobody wants to return a cashback and a mortgage broker will ensure you understand the terms of a cashback deal very clearly.
Cash reward mathematics
Since receiving the cash back on your loan means you will need to keep the loan for 3-4 years with the bank, make sure to pay attention to note whether you will be asked to pay all of the cash back or certain percentage of the cash back and how is it calculated.
If two banks have the same binding period for their cash back and the cash back is the same, then it pays to choose the bank that will allow you to pay the cash back partially if you pay off the loan before the binding period.
Also, it pays to compare the binding period of each bank and compare the average cash back per year to see which bank is more beneficial for you. Suppose one bank is giving $6K cash back but has binding period of three years and another bank is giving $7K cashback with binding period of 4 years. The bank which is giving $6K cash back ad and asking to keep the home loan for 3 years is giving average of $2K cash back per year where as the bank giving $7K cash back to stay for 4 years is giving average of $1,750 cash back per year. Therefore, the bank giving $6K cash back is better as it also gives the opportunity to perhaps again earn the cash back on the home loan earlier after three years rather than wait for four years.
Make sure you compare, contrast and ask questions and this is always easier with the help of an expert.
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In a crowded financial market, it’s hard to know who you can trust and whether you’re getting the absolute best advice, which is why Global Finance remains an industry leader. Our job is to make finance clearer with sound advice and continued support. We’re here so you can make informed decisions on your financial future without being overwhelmed. We’ll be with you to ensure you truly understand the process of lending and the relevant banking products: you’ll know which option will be best for you. If you’re in the market for a mortgage, get in touch with Global Finance today.
**These are general guidelines and are by no means a reflection of bank or lending policies