It wasn’t all that long ago that interest rate specials were the big incentive the banks used to try and win new customers.
These days, though, it’s all about cash backs.
For the uninitiated, a cash back (otherwise known as a cash contribution) is pretty much exactly what it sounds like—a lump-sum payment you get when you settle a new home loan with a bank.
Now, the promise of several thousand dollars back in your pocket might be pretty tempting stuff (who doesn’t love free money?!) but don’t let yourself be blinded by the dollar signs.
There are a few important things to be aware of, and to consider, when it comes to mortgage cash backs. Here’s what you need to know.
How much money are we talking?
The way cash backs are calculated is as a percentage of your overall loan value.
In recent years, the magic number has ranged from about 0.6% at the lower end of the spectrum, up to about 1%, depending on the bank and the state of the market (i.e. how hard lenders are having to work to attract new loans).
Right now, the standard cash contribution on offer is 0.8%—so, for your average-sized loan, you’re looking at somewhere between $5,000 to $7,000, up to a cap of $20,000 on bigger mortgages.
That said, it’s worth noting that banks may be willing to offer you more (or less) depending on your personal situation.
If you’ve got more than the required deposit, for example, lenders are often willing to be a little more generous, while the opposite will be true for low-deposit borrowers. Whether you’re buying the property to live in, or as an investor, can also make a difference.
A number of banks have recently started to offer special deals to help entice first home buyers, which generally takes the form of a higher cash back rate or a minimum cash back amount (regardless of loan size).
Because bank policy in this space is constantly changing, it’s always worth chatting with a mortgage adviser to help you understand where things are at in the market—and help you negotiate the best possible deal.
What criteria do I need to meet in order to be eligible?
1. Cash backs are only available on new loans
This is the big one. As a general rule, to be eligible for a cash back, you’ll either need to be purchasing a new property or refinancing your existing mortgage from another lender.
In other words, you won’t qualify for simply refixing your loan with your current bank (sorry!).
Banks may be open to negotiating a cash back on loan top ups as well, depending on the lender in question and your situation.
2. There are usually upper and lower lending limits
The official word from the banks is that you need to be borrowing at least $250,000 to qualify—although a good mortgage adviser may be able to negotiate a cash back on your behalf, even if you’re below that limit.
And as we’ve already touched on, banks also cap cash backs at a maximum of $20,000 on bigger loans.
Can my cash contribution be clawed back by my lender?
Yes it can, up to a point.
All mortgage cash backs are subject to a clawback period, where—if you refinance or repay your loan within that timeframe (including if you decide to sell your house)—lenders have the right to reclaim all, or some, of the cash back amount.
Up until recently, the banks all structured their clawback frameworks slightly differently, with different clawback amounts at different milestones, and clawback periods spanning either three or four years.
It made the job of comparing offers pretty confusing work for borrowers.
As part of its report into competition in banking, released earlier this year, the Commerce Commission labelled the practice “anti-competitive”, particularly given the way clawbacks were structured to deter borrowers from refinancing at the one- and two-year mark.
As of May 2024, at the Commerce Commission’s recommendation, the framework has now been standardised, meaning all lenders now work on a pro-rata basis (although still with a mix of three and four year terms across different banks).
Now, if you refinance or repay your loan the amount drops in line with the remaining term of the clawback.
(Note: The new framework has been applied retroactively to any cash back agreements already in place before the change came into effect.)
How do I compare the overall offer—including interest rates and cash backs—to work out which lender is giving me the best deal?
So, let’s say you’ve managed to secure two loan offers:
- Lender 1: Is offering a more competitive interest rate, but a smaller cash back.
- Lender 2: Is offering a bigger cash back, but a higher interest rate.
It’s important not to assume that one is better than the other, without first running the numbers.
So, how do you convert everything into one easily comparable overall rate, to work out which bank is giving you the best deal?
- Work out your cash back rate (if you don’t know it already). You can do this by dividing the cash back amount by your total loan value.
- Then divide that number by the length of your clawback term—i.e. three or four years, depending on the bank.
- Finally, subtract that from your fixed-term rate—to get your effective interest rate.
It’s always worth doing the calculation for a few different fixed rate terms, across different lenders, to help in making your decision.
Can I use my cash back to help pay my mortgage off faster?
In theory, you can use your cash back for anything you like. Renovations, new furniture, a much-needed holiday—the list goes on and on.
But if you want to be really smart about it, you might want to consider squirrelling that money away, and using it to pay a lump sum off your mortgage when your fixed term loan comes up for maturity.
By taking advantage of cash back opportunities as often as you can (i.e. by refinancing every three or four years) and using that money to pay a lump-sum off your mortgage every time, you’ll end up knocking roughly two years off your loan term.
We’ve pulled together a whole bunch of other tips to help you pay your mortgage off faster in our handy refixing and refinancing guide, which you can download here.
Get in touch today if you’d like to chat with one of our friendly mortgage advisers for guidance on cash backs, and help negotiating the best possible deal.