Generous tax-free mortgage cashbacks from big banks seemed to good to be true … they were

New home loan borrowers might be surprised to see the exceptionally generous $4000 tax-free gifts from big banks suddenly disappear, but the only mystery is why it took so long.

As we know in finance, if something looks too good to be true, it usually is just that.

For mortgage refinancers the widespread promotion of mortgage cashbacks was a godsend. But for big banks – and especially for mortgage brokers – they have been bad news.

Now it’s looking very like the big guys are moving to close the entire game down.

The nation’s biggest home lender, CBA – led by chief executive Matt Comyn – moved first to end the game and more recently NAB has nodded in agreement. By the end of June both banks will exit the market. The other two big banks, ANZ and Westpac, are expected to follow unless there is a surprise attempt to pick up market share.

What started as an occasional promotion turned into an everyday marketing exercise over the last year as banks chased the only lending business in town: home loan customers refinancing their mortgages.

Refinancing activity ran higher than anyone expected in the wake of recent rate hikes. At what may turn out to be the peak, the business was running at $20bn over the month of March.

But since the beginning of this year, there were signs the game had gotten out of hand – a rare occurrence in the banking oligopoly where four players (ANZ, CBA, NAB and Westpac) call the shots.

Moreover, the cashback game infuriated mortgage brokers because the way it works is that if a mortgage is “lost” within 12 months of being signed then the mortgage brokers generally have to hand back 100 per cent of their commission to the bank.

The so-called “clawback” conditions had been creating major stress inside the market. “The whole thing was ridiculous and it was never going to keep going,” says mortgage broker and financial adviser Stuart Wemyss of ProSolution Private Clients.

In fact, Peter White, the managing director of the Finance Brokers Association of Australia, told The Australian last year that the exploitation of the clawback system was a “dog act” by the big banks and something they would never impose on their own in-house lending staff.

For a while, it suited big banks to dish out cashbacks, which generally ran between $2000 and $4000 – and sometimes even higher.

When the money arrived in the account of the home loan borrower it was tax-free because it related to borrowing rather than investment, so it was not relevant to income tax or capital gains tax.

Everyone in banking knew that funding costs could only rise in the period following the extraordinary phase of the Term Funding Facility. But banks with the deepest pockets could offer mortgage cashbacks to win over new business even if it meant voluntarily slicing margins.

By the start of this year, many home loans sold with an attached tax-free present were loss leaders.

Meanwhile, the mortgage brokers complained and were suddenly concerned about the inflation that could be triggered by such activity at bigger banks.

By early May it was clear from the interim results at the big banks that the golden days of rising margins off the back of rising rates are over. There might be more rate rises but there will not be 11 more.

In other words, for the big banks it’s time to close down the cashback offers and everyone can return to their place in the oligopoly, the same as before, and especially the mortgage brokers.