By Alexa Tran on www.financeandcoffee.com.au
These days lenders have been aggressively competing on market share by offering up to $4,000 cashback for new borrowers and refinancers. Cashback specials are nothing new. In fact they’ve been used by lenders for years as a clever marketing strategy to grab people's attention. You choose a loan with a different lender and they promise cold hard cash deposited into your bank account when the loan settles to cover switching costs. But is it your friend?
Why do people fall for it?
According to the Australian Finance Group (AFG), seven out of ten borrowers are ‘Upgraders’ seeking finance to improve their home or the location of it or ‘Refinancers’ who want to reduce household costs and take advantage of lower rates.
It seems the banks can see our blind spots to our relationship with money. A cashback reward program is hugely attractive to these customers who are looking for short-term gains or immediate cash flow, especially during an economic crisis triggered by COVID-19.
It works on the principle of urgency, cash backs are usually offered for a limited time, specifying that you have to apply by a certain date and have the loan settled by a certain date. Then your FOMO kicks in. That’s exactly why lenders capitalise on this behavioural phenomenon.
This marketing strategy encourages customers to take advantage of the “free money” and feel good about being a “smart consumer”. But most people aren’t prepared for the miserable trap that is paying off high interests and fees.
Do you know that it may cost you six times more than you actually save? An exclusive analysis shows that borrowers of $1 million who accept a cashback from the big four bank lenders could end up paying an additional $7,300 to $12,000 over the first three years of the loan.
Here’s a refinance with CBA on Canstar:
“Many borrowers taking the cashback are only getting the equivalent of one month’s mortgage repayment on a 30-year loan. They’ve got to remember there are another 359 months to go,” says Steve Mickenbecker, Canstar’s group executive for financial services.
You may not realise it can be a package loan so you also get a credit card, an offset account plus home insurance policy and other financial services. It will come with an extra 400 dollars annual fee. And in just five years, it will eat up the full $2000 cash back.
So, don’t get too caught up with these special offers. You always need to check whether the loan itself is a good deal regardless of the cash back. Ask yourself this question: “Would the loan product still be right for me if I take away the special offer?"
Without fail, a lower interest rate will always save you more than a cash back offer, in most circumstances. Other features like an offset account and flexible repayment options also help you save money.
Give me a call and I can do the hard work and compare loans for you. You could end up with a better rate and a better home loan package.
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Occasionally I come across an interesting article to do with Home Loans. I thought I'd share some of these with you here.