Paul's Insights: A cash lure can be easy bait

According to RateCity, 29 lenders are offering cashback payments to home owners who refinance their mortgage.

The cash splash ranges from $1,000 to $4,000 per refinance, and not surprisingly, these deals are generating lots of enthusiasm for switching. Between April and August 2020, over 137,000 Australians refinanced their home loan. But being paid a wad of cash to move to a new loan isn’t always the sign of a good deal.

On one hand, the growth of cashback perks highlights how competitive the mortgage market is. There’s more to it than that though. Behavioural psychology shows that humans can easily fall for ‘anchoring’ – that’s our tendency to focus on an opening number rather than objectively comparing prices and values. Put simply, the prospect of being paid several thousand dollars to refinance starts to dominate our thinking, and deters us from shopping around or taking a closer look at loan rates and fees.

When it comes to money matters, it always pays to put things in perspective. The average home loan under two years old is currently worth $456,000. So a cashback of, say, $2,000, which may sound like a lot, amounts to less than 0.5% of the loan value. Over a 25-year term, the rate you pay is the biggest factor that will shape the loan cost.

RateCity crunched the numbers and found cashback deals were typically more expensive in the long term. So, it’s important to do the sums to see if refinancing puts you ahead financially – and not just at the point of switching to a new loan.

Always check if the rate is competitive – and in today’s market that usually means a rate starting with a ‘2’ or below. Check the loan fees and be prepared to pay hard ball, asking the lender to waive the fees if you believe they’re expensive. Where possible, tip a cashback into your loan as an extra repayment – it can knock a good chunk off the overall interest bill.

Remember too, not everyone will be able to switch to a new loan. Lenders generally like to see that you have a steady job and a deposit of around 20% deposit or the equivalent in home equity before they’ll go ahead with a refinance.

Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.