Mortgage Cashback and Incentives

Summary

• Some banks, and usually the challengers such as Heartland and HSBC, have a history of offering market-leading interest rates lower than their competitors.
• However, other banks, arguably the big four (ANZ, ASB, BNZ and Westpac), won't usually be as competitive with their interest rates. Instead, they will offer borrowers a cashback as a way to lure them over.
• If you're offered 0.1%, 0.7% or even 1% of your mortgage balance as a 'cashback', you may wonder what the catch is, given banks are not known for their generosity. 
• Our guide explains everything you need to know about the financial incentives offered by banks to win new customers and how you can make the right decision for your needs.

 
We cover:

• What is a Mortgage Cashback?
  
• Cashback vs No Cashback - How to Easily Compare the Real Cost
  
• Pros and Cons of Cashback
  
• Other Bank Incentives
• Frequently Asked Questions

After a mortgage is secured and drawn down, a bank will pay an agreed amount into the borrower's bank account. This sum is known as the 'cashback' and will usually be a percentage of the initial mortgage. Depending on a bank's criteria, cashback offers usually range from 0.10% to 1.00%, or a fixed dollar amount, known as a 'cash incentive', i.e. $3,000 - $7,500, or more, depending on the mortgage size. Having discussed cashback with mortgage brokers working with all major lenders, we understand the 'average' cashback rate offered is around 0.70%. 
 
After the cashback is paid, the homeowner can do whatever they want with it, including making an overpayment on the mortgage (if permitted). However, in most cases, homeowners will use the money to bolster an emergency fund, spend it on property-related expenses, or invest it.

Banks have a standard set of criteria that takes into consideration:

1. The size of your deposit - the lower the LVR (Loan Value Ratio), the higher the cashback. 
   
2. The size of your loan - banks like to lend as much as possible, and cashback rates can be used to win customers over.
   
3. Your affordability - the bank looks at a borrower's income and overall credit risk; the lower the risk, the higher the cashback. 
   
4. How you repay your loan - interest-only mortgages usually qualify for low cashback while principal and interest mortgages have higher cashback offers.
   

Next Steps

• Once your loan amount is agreed upon, the cashback is calculated and paid after your mortgage is registered.
  
• As an example, if you've taken out a loan of $500,000 with a 20% deposit, the bank may offer a 0.7% cashback. A payment of $3,500 would be made in the first weeks of your mortgage. This sounds like a lot, but if your mortgage rate is, for example, 3.75% p.a, you're only 'paid back' a fraction of the interest cost you'll pay in the first year ($15,000 in this example).
  
• Know this: Unlike interest and principal payments, which run for the life of the mortgage, your mortgage agreement only pays out your cashback once. 
  

Banks use cashback as a marketing strategy to attract and, all going well, retain mortgage clients for years to come. The upfront cost seems generous, but banks don't lose money on such deals - most stipulate that you'll need to stay with the lender for at least two years.  
 
Pro tip: If you're looking to get a mortgage, ask about cashback offers upfront. This shows the broker and/or bank that you're informed and know that they exist. Unfortunately, many borrowers don't know (or don't ask) due to other priorities when buying a home. 

An example explains why using a mortgage amortisation calculator is essential:

• Mike and Aroha are deciding between mortgage offers from two banks for a $500,000 loan.
• Bank A offers 3.50% p.a. fixed for three years, while Bank B offers 4.15% p.a. fixed for three years with a 0.70% cashback (meaning a payment of $3,500).
• To compare the total costs of borrowing, Mike and Aroha add up the sum of the interest repayments for the three years the mortgage is fixed for.

The results are presented below and show the cashback mortgage with the highest borrowing costs. We have compared the mortgage cost over three years as we assume a borrower would remortgage at the end of the term.

Free money from a bank sounds appealing, but a cashback may not always be in your best interests, as we outline below:

Pros:

• A significant amount of money coming into your bank account is always going to be useful, even if you allocate it immediately to your mortgage balance.
• If you have a large deposit, i.e. 40% or 50%, you are in a strong position to negotiate above the standard cashback rate and bring down the cost of borrowing.
• If you secure a market-leading mortgage rate and it comes with cashback, your borrowing costs will be as low as possible.

Cons:

• It's not unusual for mortgages offering cashback to have a slightly higher interest rate (given the costs of giving away free money need to be recouped).
• You sign a deed of debt that requires you to keep your loan with the bank for a certain period. However, if your circumstances change and you sell your home or repay the mortgage within the cashback repayment period, you will need to repay either the full amount or a portion of it (per the mortgage contract). You'll also need to pay any mortgage break fees (which are calculated and charged separately) on top of the cashback repayment. 
• If your mortgage is small and/or you have a small deposit, your cashback offer will be correspondingly small.

Sometimes banks don't market cashback as 'cashback' but instead use terms like cash contribution, cash rewards, cash, cash incentive or first home bonus. Examples include:

1. Kiwibank: A recent promoted stated "Cash contribution - we'll contribute $2,000 towards your first home expenses when you draw down your home loan".
   
2. BNZ: A recent promotion stated "Cash Rewards" - Enjoy Cash Rewards on your BNZ Advantage home loan at a rate of $1 for every $1,000 outstanding on your loan balance each year. For example, that's $350 a year on an average home loan balance of $350,000".
   
3. ASB: A recent promotion offers cash rewards: "First home buyers get $3,000 cash. Minimum".
   

 
Please note, these offers can change at any time without notice, and not all borrowers qualify.
 
Pro Tip: We continue to receive emails from MoneyHub users that complement their mortgage brokers for negotiating higher-than-expected cashback deals. Mortgage brokers don't charge a fee for their services and can save a lot of time - our guide has more details. 

This varies depending on the bank. We understand that the BNZ has a four-year term, and ANZ, ASB, Kiwibank and Westpac stipulates a three-year term. Other banks, when offering cashback, will range between two and four years. 
 
Some banks let you pro-rate the cashback. For example, if you received a $10,000 cashback from the BNZ under a four-year term and switched after two years, you would still need to pay back half of the money. This assumes a pro-rata rate of 25% per year for four years. 
 
Before signing any agreement, make sure you clearly understand the repayment terms and conditions. 

It all comes down to the numbers - our spreadsheet you can download calculates this for you (please click to download).

If you're a KiwiSaver member, you may be eligible for:

1. KiwiSaver First-Home Withdrawals: Withdraw up to everything in your KiwiSaver fund (except the initial $1,000 Government contribution) and put it towards your first house or apartment.
   
2. KiwiSaver HomeStart Grant: If you've contributed regularly to KiwiSaver for at least three years, you may be eligible for the KiwiSaver HomeStart grant with a cash payment of between $3,000 and $10,000 depending on your circumstances and type of home you are buying.
   
3. Kāinga Ora and Kiwibuild - this government website has more details about the support available.