Hefty mortgage ‘cashback’ offers heading for a clampdown

Generous tax-free ‘cashback’ deals for refinancing mortgages are in the gun as brokers try to stem money flows back to the major banks.

Soaring cashback deals, which are now running at up to $6000 per home loan, have been blasted by mortgage brokers who are moving to limit the offers from the major banks.

With millions of Australians refinancing their home loans after fixing at record low levels during the Covid-19 crisis, the so-called ‘mortgage cliff’ has become the key line of business for all banks as new lending drops dramatically.

Under cashback promotions, a borrower who can be refinancing or taking out a new loan will get cash put into their account tax-free by the bank which gets the new line of business.

But the managing director of the Finance Brokers Association of Australia, Peter White, says a flood of ever more generous cashback offers are a ‘dog act’ from the banking industry. White said there is ‘borderline misleading behaviour’ from the banking industry in the race to sign up borrowers rushing to refinance.

Mortgage brokers are furious with the banks for cranking up the cashback offers because mortgage brokers regularly end up effectively subsidising the deals. Under current arrangements, mortgage brokers must pay back a tiered amount of their initial commission from the banks if a borrower refinances within two years.

There is no limit under banking rules to cashback offers – until recently the deals were linked to special offers, but they have now become a permanent feature of the lending industry with a wide range of banks and non-banks offering such promotions: The way it works the more attractive the cashback the more likely a consumer will refinance: In turn more refinancing makes it more likely the mortgage broker will have faced a ‘clawback’ on their initial bank commissions.

The FBAA is now working on a report on the issue which will go to the Minister for Financial for Services, Stephen Jones, who has indicated he is willing to review the relationship between cashback and so-called ‘clawbacks’ – where the broker must return commissions to the bank.

It is understood that broker representatives want to limit the cost of cashback to mortgage brokers with no returning of commissions after one year and revised terms for periods of less than one year – a move that would immediately dampen the banks' willingness to create new cashback deals.

Meanwhile, mortgage refinancing is the hottest sector in the lending market – the last reported figures for August were the highest on record, with $19bn in refinanced loans during the month. In contrast, new mortgage lending – the backbone of the lending industry – had dropped 25 per cent since the start of the year to $25bn per month.

Cameron Kusher of Proptrack said, “You can’t blame consumers for trying to get the best deal. The banks know that for the next six months the refinancing market is going to be very strong, and they are pulling out all the stops to expand market share.”

As a marketing tool, the cashback promotions are an outstanding success, Borrowers on tight budgets can suddenly receive thousands of dollars in their accounts. Better still the money is tax-free as it relates to borrowing rather than investment, it is not relevant to income tax or capital gains tax.

National Australia Bank subsidiary uBank’s $6,000 cash back offer is one of the highest in the market among mainstream lenders – as with all deals it has special terms, in this case it is for loans of $1m or more. Under $1m, the cashback is $4,000. At AMP there is a $5000 cashback offer, similarly Bank of Melbourne, St George and RAMS all have $4,000 offers. One lender, Reduce Home Loans, is advertising a $10,000 cashback offer.

As one broker explains: ‘I am basically working for nothing if the loan gets refinanced within two years and I can’t do a thing about it. Mortgage refinancing is just about the only thing happening right now. The arrangements are not fair, you would not see a bank doing this to one of its own lending staff.’

At the FBAA, White said the cashback model has to change, the system has to work for all stakeholders.

“We had a member recently where the loan was refinanced just two weeks inside the deadline – that’s it, they are trapped, and they lose. But nothing is ever free in the banking system and consumers should be aware here, the banks will seduce you with a cashback. It looks fine from the consumer side, but it’s not. Nothing is ever free in banking, and the consumer will pay for this down the track.”