Banks’ big home loan cashback masks attempts to rebuild margins
Aaron Wood / Stuff
Property sales are anemic as interest rates rise and house prices fall.
OPINION: This is called a “cashback war”.
Some banks offer deep cashback after people take out a new loan with them.
BNZ is offering up to $20,000 in cashback and state-owned Kiwibank is offering up to $10,000. Westpac is offering a raffle with five prizes of $50,000.
These are time-limited offers for new borrowers, and mortgage brokers see them as part of a strategy by banks to rebuild margins on home loans.
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Cash back has generally been the preserve of lower-level auto financiers. These were high-cost car loans marketed with the promise that the lender would “give” the borrower both a loan and cash back to spend on whatever they wanted.
There is no free money, and in my book it was pure exploitation of people who were in desperate need of money.
By contrast, banks have traditionally agreed to pay some of homebuyers’ costs, such as their legal fees, but these new repayment offers are different from those, mortgage brokers say.
This is the worst time for first-time home buyers in New Zealand for 65 years.
Home loan repayment is the money that banks pay borrowers after they have taken out the loan to buy a home. It is not related to their purchase costs. It is an incentive for new borrowers to join the bank making the offer.
Mortgage brokers see cash back as a clever marketing ploy contributing to banks’ mission to increase their profit margins on loans.
Banks’ margins were higher in 2018 and 2019 than they are now, although they have rebuilt their margins since 2020 and 2021, according to figures from Reserve Bank Te Pūtea Matua.
Cashback is designed to attract new borrowers and reduce risky borrowers.
Banks have now suspended lending to people with less than 20% deposits, a broker has said.
BNZ and Kiwibank cashback is limited to borrowers with 20% or more equity.
This has made cash back a gift to high net worth borrowers, including those who sell one home and buy another, or simply transfer their high equity home loan from one bank to another.
Not much help for first time buyers without access to mom and dad’s bank.
Brokers believe that the cost of home loan repayments is effectively spread by banks over all of their home loan borrowers.
This is because banks have become reluctant to give their current borrowers reduced rates on home loans.
Previously, a “good” borrower with a bit of negotiating skill could ask their bank to give them reduced mortgage rates, for example, by cutting their fixed-term rates by 25 basis points, and they could get this discount each time a part of their loan came to be re-fixed.
These days, banks will lower rates to match their lowest rival, if they think a borrower might really stick with another bank.
But that’s about it, even if they are willing to negotiate variable rate loans, which remain expensive.
That’s why brokers and economists see cashback as part of a margin rebuilding strategy, helping them lock in future profit surges.
The government may have allowed this strategy.
It has become more grueling to switch loans between banks, since the government has tightened responsible lending laws. Combined with people retrenching in the face of higher costs and a jittery economic outlook, there aren’t many people switching banks.
Granted, brokers are doing less of this change trade than in the good old days before Covid and the fall in house prices.
Like other special offers for new borrowers, such as low-interest, no-interest “balance transfer” offers on credit cards, cash back will leave a sour taste in the mouths of existing borrowers. banks.
Many people are about to re-fix portions of their loans at much higher interest rates than they paid.
They have been enriching their banks for years, and they can be forgiven for being irritated to see the money “returned” to the new privileged borrowers.