The best mortgage cashbacks on offer

Australian homeowners with a mortgage have been hit by wave after wave of interest rate hikes since the Reserve Bank started lifting the cash rate in May - not that many will need reminding, that is.

Rather than taking higher repayments lying down, plenty of borrowers in a position to refinance have taken action and switched lenders to nab a better deal though. In fact, $18.9 billion worth of loans were refinanced in August according to the Australian Bureau of Statistics, which is the largest amount on record.

Kanishka Raja, chief lending product officer at ubank, says the online bank has seen a marked uptick in the number of homeowners looking to make the switch in recent months.

"I think what's happening is that with higher interest rates, and also so much focus around inflation, a number of customers are looking at their mortgages and asking whether they are getting the best deal out there.

"And as a part of reviewing that home loan, whether it's with a broker or by themselves, they are shopping around, so we're seeing an increase in the number of refinances that are happening compared to new property home loans."

Cashback on the rise

As borrowers have flocked to switch, lenders have also stepped up their game to entice refinancers with incentives beyond interest rates though. Incentives like cashback deals.

Generally, these limited-time offers come in the shape of a lump sum in the thousands of dollars, though they only tend to be available to refinancers who meet specific criteria relating to the size of the loan and the loan-to-value ratio (LVR).

UBank is one of the lenders currently offering a cashback deal to refinancers which, Raja says, is not just a promotional opportunity, but also about compensating borrowers for the cost of switching.

"The real intent of the cashback offer is to make sure that customers are not out of pocket when they refinance their home loan from one lender to another," he says.

"Quite often what happens is that if you're on a fixed rate home loan and move to a different lender there will be break fees associated with it, and then there are also discharge fees."

Of course, UBank isn't the only mortgage provider on the market with a cashback deal. There are currently 27 unique cashback deals on offer from 26 lenders in financial comparison website Mozo's database - a number which is much higher than in previous years.

"In recent times we've seen the number of cashback offers increase steadily. Back in 2019 only five lenders offered cashback, but right now 26 lenders have cashback offers," says Claire Frawley, Mozo personal finance expert.

It's not just the number of cashback offers which has been on the rise though. The deals also appear to be getting more generous, with a handful of lenders now offering $4000 or more in cashback.

Highest home loan cashback offers

Cashback or a lower rate?

Given the size of some of those deals, opting for a loan with cashback when refinancing may be tempting, but how could a loan with cashback compare to one offering a lower interest rate?

Let's use homeowner Emily as an example. Emily has $400,000 and 20 years left on her loan which she's paying off with a variable rate of 5.00%, but she's looking to refinance, and after doing her research she's narrowed it down to two options which are identical aside from the rate and cashback offer:

• Loan A has a variable rate of 4.75% and a $3,000 cashback deal
• Loan B has a variable rate of 4.50%

If Emily opted for Loan A, she'd reduce her repayments to $2,585/month and if she happened to stay on that same rate for the life of the loan, she'd pay $220,375 in interest all up. She would also get $3,000 back in her pocket via the cashback deal.

On the other hand, if Emily opted for Loan B, her repayments would be a lower $2531/month and she'd pay $207,344 in total interest over the life of the loan.

In short, it would take four and a half years for the lower monthly repayments offered with Loan B to make up for the $3,000 cashback offered with Loan A, but over the long run (if the repayment difference remained the same), Emily would save more money by going with the lower rate option.

"If a borrower can find a cashback offer on a home loan with a lower interest rate than the one they are currently on, it could be the cherry on top in terms of refinancing," says Frawley.

"However, if you are not getting a lower rate then you really need to weigh up if a cashback offer is the right reason to move lenders."

What else do refinancers need to weigh up?

When comparing loans, Raja agrees that would-be refinancers may want to think about more than just a cashback deal.

"Beyond cash back, there are a number of things that savvy customers tend to look at. First and foremost is the rate on offer and whether it's competitive and within the ballpark of the most competitive rates out there."

"Customers also consider the fees that are associated with the ongoing maintenance of the home loan and the features associated with it, like an offset account which allows you to offset and reduce your interest."

Ultimately, says Frawley, because of the potential savings on offer with refinancing, especially for those on an uncompetitive interest rate, it can be a no-brainer for those in a position to do it - with or without cashback.

"Borrowers with 25 years left on a $500,000 loan could save up to $4,788 a year off their mortgage by switching to the lowest variable rate in the Mozo database (3.59% p.a.) from the average variable interest rate (5.01% p.a.)."

For more refinancing tips and tracks check out our recent article looking at how to refinance your home and get better interest rate, or start comparing home loan rates to see how your current offer stacks up.

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