Mortgage advisers’ phones have been ringing off the hook as home loan borrowers chase banks’ 1.5% cash back offer.
ANZ ignited the mortgage wars as the first bank to offer the incentive until mid-December. The other main banks have followed.
“It is the best news clients have received before Christmas. It is straight cash into their back pocket,” Nathan Miglani, Squirrel Mortgages Christchurch managing adviser, says.
Miglani has been in the mortgage advice business for 15 years and says it is the first time he has seen a bank compete at this level. “It is aggressive and generous – about twice as much as usually offered. Anything above 1% is unusual. The mortgage wars have definitely heated up.”
Squirrel clients have been quick to take advantage of the offer. “We were about to send documents for a $800,000 loan to a client’s lawyer with an original cash back contribution of less than $8,000. After renegotiating with the bank that client will now be getting $12,000 back. Another client borrowing about $1.6 million will be getting a cash back of $25,000.”
Cash back offers rather than interest rates have been used by the major banks recently to attract new clients.
The number of people switching banks has been running at record levels for most of this year. In July $2.6 billion in loans changed provider. Last year it was about half of that. While the numbers were down to about $2 billion in August and September, they are expected to climb substantially with the new cash back offers.
“An ANZ credit manager says the bank’s mortgage application volumes have already gone through the roof with the new offer, Miglani says.
The cash back is already priced in by banks, he says. Fixed term home loan rates are five to 10 basis points higher than they would be if the cash backs were not being offered.
It’s all about the money
Mortgagesonline founder and adviser Hamish Patel says nobody is asking about interest rates, they are just totally focused on the cash. “It is all about ‘show me the money’.”
He says some investors with big mortgage loans are willing to pay all sorts of break fees even if they haven’t been with their existing bank for more than three years – the time banks usually insist a client stays when they offer a cash back.
“If they can get $30,000 back in cash and they have to pay a $10,000 break fee, they will pull the trigger.”
Patel says competition for clients is at a peak amongst the banks. “They have been sitting on a bit more of a margin lately and probably think the OCR is going to come down again this week. So maybe, they are front footing it.”
While it is driving more competition, Patel says it may mean more clawbacks for advisers as clients are more motivated to switch banks before the “golden three year period” is up if cash back incentives of more than 1% are regularly offered.
“Since last year’s Commerce Commission inquiry into banking competition, the banks are have become a bit more linear in the way they recover customers’ cash backs. Advisers are not getting hit with clawbacks for the whole cash back, but only part of it if their clients move before three years.”
He says it has become fairer for advisers but with bigger cash backs it could set advisers back, especially if multi-property owning clients with big mortgages decide to switch banks every two years even if it involves paying substantial break fees.
“When you start talking about $2 million worth of lending or more, then that's $30,00. So, even a client has to pay half of the previous 1% cash back - $10,000 - they might still end up with $20,000 in their pocket. It is a no brainer for many.”
However, he says for somebody with a $650,000 mortgage it is probably not worth paying a break fee. “For $2-3,000 it is not worth it.
“Once it gets to $4,000 plus in the back pocket, it is worth considering. That seems to be the magic number. But if it means going through the rigmarole of setting up new bank account and the lawyer snapping up $1,200-1,500 for refinancing, many clients won’t bother.”
Building up a war chest
Miglani and Patel recommend their clients think wisely about using the extra cash in their pockets.
Patel says it is a good idea to build up a war chest through the use of revolving credit and offset home loans. “Everybody has learned interest rates can head up at any point, so the more people get into the habit of building up a war chest of emergency funds the better off they are.
“It will build up confidence for buying an investment property or trading up homes.”
Miglani says it is an opportunity for home owners to pay their rates and insurance in full for a year and if there is any spare cash to eat and drink what they like at Christmas.
He says it is also a good time for first home buyers to be in the market because of the competition between banks. “I wouldn’t be surprised if before the new financial year one of the big banks will have a rate of 3.99%.” The SBS is the only bank with a one-year fixed home loan rate of 3.99% for first home buyers. “If that happens the other banks will follow,” Miglani says.
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