What Is Mortgage Cash Back?

Could a mortgage cash-back put thousands in your back pocket?

Mortgage cash back is an incentive banks use to entice new business. It is an upfront cash payment made to you for you bringing your custom to the bank in the form of a new mortgage. Mortgage cash back is now common across major New Zealand banks, as they try and entice customers away from each other. The payment could be for new lending – such as if you’re a first home buyer or property investor buying another property – or existing lending should you decide to switch your existing mortgage between banks.

An Example of Mortgage Cash Back

A good cash-back offer can be an important factor when you obtain a mortgage. For example:

A sizeable cash back offer can 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 6.60% and 6.65% 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 $4 per week, or $208 for the full fixed-rate period (one year). Best of all, after a set wait period is over, perhaps three-years the couple agreed to stay with the bank for to get the cash-back, the couple can seek-out another cash back offer with an entirely different bank!

In the example above, if the couple just focused on the interest rate alone, they might not realise the benefits of a good cash back deal. In plenty of 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 are usually financially stretched as they move into their first home. They’ll usually have a legal bill to pay for conveyancing the home, moving costs, furniture, household effects, certain appliances, and may need minor repairs on the home they move into.‍
• Existing homeowners. 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 little as some legal fees and time taken to complete some paperwork – which can potentially be paid for by part of the 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 homeowners, 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.

Apart from covering the legal fees, this incentive provides you with a versatile financial benefit that can be used in several ways to enhance your experience as a homeowner. These might be a holiday away, small renovations, furniture purchases, a bigger vehicle to suit a growing family or something entirely different.

How Big Is the Usual Mortgage Cash Back?

The size of mortgage cash back offers are usually based on a percentage of the initial mortgage. Depending on a bank's criteria, cashback offers might range from 0.10% to 1.00%, or a fixed dollar amount, known as a 'cash incentive', i.e. $3,000 - $20,000, or more, depending on the mortgage size.

Just like mortgage rates and offers fluctuate based on market conditions, the economy, and any other number of reasons, the size of a usual mortgage cash back fluctuates, too.

Drawbacks of Cash Back

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 terms and 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.

One of the benefits of using a mortgage broker (“mortgage adviser”), including our lending team here at Become Wealth, is they can work out the overall financial benefit of cash backs and discounted rates versus any other costs, plus maximise the cash-back sum depending on what is on offer in the marketplace at any given time. For example:

• 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 – focusing too much on the cash back (or interest rate) might disadvantage you in other areas.
• Cash backs require that a customer stay with the lender for three-or-so years, otherwise the bank can claw it all or a percentage back off you (called a claw back). 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. Take advantage of it while you can as it may not be there forever.  
• If you’ve got a small mortgage, the mortgage cashback offer will also be small.

Could You Benefit From a Mortgage Cashback?

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, or just a chat with one of our lending team. Even if you are still within your three years ‘claw back’ period.  Pop us your details and we’ll be in touch within one working day.