Warning: Bank cash tempters come with strings attached

Monday, 19 November 2018

Buyers are being warned to understand what they sign up to when they take a cash 'sweetener' from the bank.

Banks often offer cash payments of thousands of dollars to new borrowers to win their home loan business.

During the height of the property market, this ran to $10,000 or more for big business. Now, it's common to get a few thousand to cover legal fees.

Broker Callan Wayne-Bowles, of the Home Loan Shop, said sweeteners were often 0.5 per cent to 0.8 per cent of the total amount borrowed, if the borrower had more than 20 per cent equity.

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Those with small deposits can sometimes get cash incentives, too, but not as big.

The deals are usually for customers who are new to the bank, rather than existing customers refixing.

But there are strings attached.

In return, the bank requires the borrower stay with it for about three years.

Wayne-Bowles said that did not always work in borrowers' favour.

'The banks like to get new lending on the books with a one- to two-year fixed rate and a cash payment that ties clients in for minimum three years depending on the bank. 

'When the fixed rate is up the client is stuck with what refix rates the bank offers as it is typically not financially viable to refinance to another bank and pay the cash back let alone the effort required to do so.'

Bruce Patten, of Loan  Market, said he had seen clients caught out and having to pay it back.

'If you move and keep the mortgage with the bank, they wont claw back, but if you refinance to another lender they will clawback,' he said.

'Borrowers get a better rate somewhere else and move, but don't always check that there is a clawback on the cash until settlement occurs. Something to be aware of.'

Wayne-Bowles and other brokers said buyers should consider the overall proposition.

A smaller player such as SBS might have a lower upfront rate - it is currently advertising 3.95 per cent for a year and might offer up to $1500 cash on a $500,000 loan, he said. But a main bank might offer $3000 to $4000 cash and a rate of 4.05 per cent.

'It's very important for the overall cost of debt over time,' Wayne-Bowles said.

'The cash which you get on day one is more than the interest savings. '

Broker Glen McLeod, of Edge Mortgages, said he had seen cases where one bank offered an interest rate half a percentage point lower than the other, but the more expensive rate came with a cash offer $2000 bigger.

That cancelled out the benefit of the cheaper rate.