For some years now, New Zealand’s main banks and other mortgage lenders have been known to offer a cashback reward to eligible customers when they draw down (start) a new mortgage. It’s typically a lump sum cash payment of $1,000 to $3,000 – or even significantly more, depending on how much you’re borrowing.
In this article we explain what a mortgage cashback is, how to compare them to other mortgage incentives and how a mortgage broker could make it easier to get the best deal.
Why do lenders offer mortgage cashbacks?
Mortgage lenders frequently offer incentives to attract new customers or keep existing ones. The incentives are not always advertised and their value can vary quite a lot. They’re basically used as part of a wider strategy to discourage you from signing up with a competitor; whether you’re buying a new house or simply restructuring your current mortgage.
Here are some of the more common promotional offers used by mortgage lenders:
- A discounted interest rate for the first six months or year
- A contribution to your legal fees
- Financial help with any early repayment break fees your current lender might charge
- A parcel of points for a reward scheme
- Reduced home and contents insurance premiums for a limited time
- No mortgage application, set up or documentation fees
- A one-off mortgage cashback payment
Is a mortgage cashback worth it
On the face of it, having thousands of dollars paid into your account has to be a winner, right? This might be particularly true when you’re getting a new mortgage and have quite a few expenses to pay, like legal fees, moving costs, essential new furniture and so on. But there are a few things you could consider before accepting the offer.
You may be locked in for a few years
Most cashback offers require you to keep your mortgage with the lender for up to three years. If you break away before that time, you have to repay the entire cashback amount. If you plan to sell before the time limit is up, there’s no advantage to the cashback offer.
Also, if you take out a mortgage with a fixed rate term that ends while you’re still locked in, your negotiating power for the next interest rate is not going to be as strong. That’s because you can’t switch to another lender without repaying the cashback incentive in full.
It depends on what you do with the cash
If you use the cashback to immediately repay some of what you owe, you’ll pay less interest for the life of your loan. That means more of your regular mortgage payments will go towards repaying what you owe, which further reduces the interest charged next time.
For example, if you make a lump sum repayment of $3,000 in the first year of a $400,000 loan with a 4% p.a. interest rate and a term of 25 years, you’ll save $4,787 in interest over the life of the loan and pay it off three months earlier. Those three months of no mortgage payments effectively give you your $3,000 back, on top of the interest saved. You can use the ‘extra repayment’ feature of our mortgage repayments calculator to work this out.
How to tell if a cashback is better than a discounted interest rate
Obviously this depends on the deals being offered. Our mortgage repayments calculator can help you get a rough idea of the difference between two options. Individual lenders are unlikely to offer you an ‘either or’ situation, but doing these calculations is useful if you’re comparing offers from different lenders. Here’s how to do your own assessment of a discounted interest rate:
Enter your loan details and the standard interest rate offered, to see the regular monthly or fortnightly repayment amount. Repeat this with the discounted rate, then subtract the discounted regular repayment amount from the standard one. This will show you roughly how much you’ll save on each repayment. Finally, multiply this amount by the number of payments until your special rate offer ends. So, for a one-year discount offer, that would be 12 monthly payments or 26 fortnightly payments. Now you have the total amount the discount will save you and you can compare it to any lump sum offer.
Example: A $400,000 loan with a 4% p.a. interest rate and a term of 25 years, compared to a special discount of 0.2% for the first year, which means 3.8%.
- Standard fortnightly repayment = $974
- Discounted rate fortnightly payment = $954
- Difference per payment = $20
- Times 26 fortnightly payments over the discounted one-year period = $520
In this case, a cashback of up to $3,000 is likely to be a much better offer.
How to get a mortgage cashback
One of the easiest ways to get the best deal for you, whether that’s a cashback or not, can be to work with an experienced mortgage broker. There’s usually no charge to use one, as the chosen lender pays them for bringing in your business. They usually only work with some lenders though, so be sure to ask which ones.
A broker will have a really good idea of the best incentives and interest rates being offered by all the lenders they work with. They know the actual incentives and rates secured, not just the advertised ones. This, along with the ability to take your business to another lender, puts the broker in a strong position to negotiate hard on your behalf. A broker can also help you to understand which deal is best for you and your plans.