Refinancers collect a cash bonus

A relentless string of interest rate rises has encouraged homeowners to shop around for a better deal

After every cash rate hike from the Reserve Bank, I imagine a western-style standoff playing out between the banks. Pistols at dawn, or rather, after 2:30pm. Who will draw first? Who will announce the unwelcome news to customers that, regrettably, the latest increase will be passed on in full, breaking the dam wall for every other bank to follow suit?

Of course, these announcements have become all too familiar for property owners with a mortgage, many of whom will have seen their interest rate double in the past year and their repayments soar by hundreds of dollars each month. Not that anyone will want to be reminded of that fact.

What is encouraging, though, is that rather than raising the white flag in the face of this relentless tide of rate rises, plenty of homeowners are pushing back by refinancing their loans. In November alone the Australian Bureau of Statistics revealed that a record $19.4 billion worth of loans were switched from one lender to another, suggesting that plenty of borrowers are seeking greener, and better value, pastures elsewhere.

The prospect of securing a lower rate isn’t the only alluring part of refinancing, though. As anyone who’s recently visited a bank’s website or seen a home loan advertisement will be able to testify, mortgage cashback offers are well and truly in vogue. For those unfamiliar with the concept, cashback is exactly as it sounds: a cash sweetener, often in the thousands of dollars, for those willing to make the switch.

Given the financial hit many mortgage holders have taken recently, a tidy bit of cash to go along with a lower interest rate will sound like a pretty good deal to prospective refinancers. And it might well be, but here are four things to consider before taking up that cash.

1. Are you eligible?

Unfortunately, the reality is that not everyone will be in a position to refinance in the first place, and the bar to snagging a cashback deal can be even higher. Typically, borrowers will need to have a loan-to-value ratio below 80% and a loan size greater than $250,000 to be eligible for one of the cashback offers on the market. Even those who tick all the boxes won’t want to drag their feet, because most deals require the new loan to be settled within three months.

2. The size of the deal

Just as you would compare lenders and loans on interest rates, fees and features, the variety of cashback deals makes shopping around a must. To give you a sense of what’s out there, at the start of February, 30 lenders in the database of financial comparison website Mozo were offering cashbacks ranging from $1500 to $10,000.

Before you get too excited, the most generous deals tend to be for mortgages over $1 million, though borrowers refinancing lower amounts will have plenty of options in the $3000-$4000 range from a variety of lenders including major banks, customer-owned institutions and non-bank lenders.

3. The cost of switching

If you’re lucky enough to be switching from one fee-free loan to another, then I take my hat off to you, but chances are that the process of refinancing will come with few additional costs: either in the form of exit fees to

discharge your existing loan or any upfront fees from a new lender.

The equation becomes even more complicated for anyone considering refinancing a fixed rate who will likely be charged a separate break-cost fee that could eclipse the value of refinancing at all. The short of it is that you’ll want to weigh up any fees involved against the potential savings of refinancing, including the cashback.

4. Cash or lower rate

One of the most common questions of all is whether it’s worth punting for a cashback deal or a lower interest rate? Here’s one example to illustrate the benefits of both options.

Let’s say you have 20 years left on an outstanding loan of $500,000 and you’re tossing up between refinancing to Loan A or Loan B – both of which have lower rates than your existing loan. Loan A comes with a rate of 5.30% and a $3000 cashback offer, while Loan B has a rate of 5% and no cashback. Crunching the numbers, the cashback deal could make Loan A the more appealing option initially, but after three years the $83 difference in monthly repayments would put Loan B ahead.

Of course, this example doesn’t include how that cashback amount is used in the meantime, nor does it factor in the possibility of refinancing again during that period. At the end of the day, the answer will depend on your own situation, but the aim of the game should always be securing a better deal.

5. Review your loan regularly

If you go with a bank that offers a cashback, make sure you follow it up with your mortgage broker or the bank, nailing down the date when you can expect the cash to come through and, if you have multiple accounts, to which account. Depending on your home loan provider, it might not transfer the funds immediately and you’ll have to wait until after your first loan repayment.

And while Loan B – the lower interest and no cashback scenario – could be better in the long term, some savvy home loan owners refinance their loan every three to four years, or when they are eligible to switch without penalties, which means they still get the advantage of the cashback offer. Either way, don’t leave money on the table. In a way, getting a home loan should be treated like getting a car. You only stick with it for as long as it works. When you find a better option that suits your needs, switch.

Tom Watson is a senior journalist at Money magazine, and one of the hosts of the Friends With Money podcast. He’s previously worked as a journalist covering everything from property and consumer banking to financial technology.