Some banks will pay you cash to give you a loan. Are cashback home loans a scam?
Key takeaways
- Cashback home loans are legit: you can get up to $4,000+ for switching your home loan.
- Review the interest rate, as a higher rate can wipe out your cashback. If the rate checks out, the cash lands in your account after settlement.
- Factor in switching fees, LVR and any cashback clawback rules (where you have to pay them back if you leave) before refinancing.
Loads of banks will pay you literally thousands of dollars to take out a home loan with them.
But if you think getting cash for switching your loan sounds a bit suspicious, you're right to have questions. These days, any sort of free lunch should set off "scam alarm bells".
But in this instance, it's legit, and it's a great way to boost your savings. I've refinanced for a cashback half a dozen times, and each time, it's felt like a little bit of magic when the money lands in my account.
So what's a home loan cashback all about?
Banks are famous for treating new customers to better offers than existing customers.
So they'll offer cashback home loan incentives to attract new mortgage customers, especially people who are refinancing from another lender.
It's not a scam, but it is annoying for the existing customers who don't get 'wined and dined' after they've signed their loan contract.
Alright – what's the catch?
Obviously the bank expects to make its money back through your mortgage.
A $4,000 cashback is generous, but your new loan is going to be worth hundreds of thousands of dollars in interest to the lender over many years.
Which means you need to look at the whole deal before getting excited about the cash. There are 3 things to consider:
1. Check the interest rate
This is the biggest one. You need to make sure the interest rate on the cashback home loans is the same or less than your current loan.
→ For example: if refinancing means you pay an extra $100 in monthly repayments, that's $1,200 a year. Getting $3,000 cashback is great, but it would effectively be eaten up in less than 3 years, and that's not even counting refinancing fees.
On the other hand, if the new loan has the same or lower rate and you get cashback on top, you'll genuinely come out ahead.
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2. Check the switching costs
Refinancing can involve costs like discharge fees, application fees, valuation fees and other settlement costs.
→ Some lenders: waive these fees or may have an ongoing offer of $0 application and ongoing fees, which is why it pays to shop around.
Some lenders can also claw back the cashback if you leave early (under 12 months). Also check the T&Cs for eligibility requirements, application deadlines and minimum loan amounts.
💰Check out the full (potential) costs of switching your home loan
3. Check your LVR
This is your loan to value ratio, which is when you divide your loan (eg. $600,000) by the property's value (eg. $900,000) to get a percentage (in this example: 66.6%)
→ 80% LVR: is the magic number. If your LVR is lower than this, you're a good risk. Anything above 80% is riskier for the bank.
This usually requires LMI, an expensive insurance premium you have to pay, which can make refinancing unaffordable.
💰Your guide to working out your LVR in 60 seconds
After all of this, is a cashback home loan worth it?
It can be. Five years ago, refinancing and cashbacks gave me $16,000 in savings. I refinanced again last year to a home loan rate that was just 0.01% lower than my current rate, a saving of $75/month ($900/year). It gave me cashback of $2,500, which landed in my account a few weeks after settlement, and the fees were about $400.
- Cashback = $2,500
- Repayment savings year 1 = $900
- Fees = -$400
- = $3,000 total benefit
Just make sure you check the interest rate, fees and switching costs to ensure you end up ahead.
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