I have spoken about this before but just as a refresher, & to set the scene, the banking regulation body APRA announced changes in July 2015 in respect to the increased amounts of liquid / cash assets the banks had to hold as a minimum percentage of their total assets. That direction was given because of the regulator & Government concerns over inflated property values, particularly in metropolitan areas. This will be enforced from July 2016. Of course the major banks were impacted greatly because it was directly felt in their profit position, in respect to returns they get on their assets. They hold the majority of Australian mortgages (80%). As we know from speaking with our financial planners, general returns are lower on cash assets than say shares & property.
So moving on from the above , the banks lifted their variable interest rates to try & counter the loss of profit margin, but of course in doing so that stimulated mortgage holders into reviewing their home loan position. Widening variances in interest rates are now encountered from bank to bank & non- banks alike, & the major banks total volume & percentage of home lending has come under pressure. This was good from the perspective of increased competition & that’s also reflected in the third party broker channels who are now writing close to 60% of total mortgages written in Australia today. Over recent months the major banks have embarked on their ‘’cash back’’ campaigns in order to keep their lending volumes up. This is what I’ve referred to as their ‘Magic Lending Trick’ . These ‘cash back offers’ are around $1200 to $1500 given as a reward to ‘new’ to bank customers. Several points to highlight which can impact on these offers:-
They are not offered to existing clients of the major banks. That’s not particularly helpful in building long term relationships.
Some of the non-bank lenders already offer owner occupied basic variable home loan rates below 4% & the major banks like products, currently start at 4.24% & move up from there. So let’s assume a minimum difference of ¼ of 1%.
Changeover costs involving exit fees often amount to a minimum of $500 & cannot be avoided because they represent outgoing banks discharge fees + Government mortgage registration fees.
So as an example & using the bullet point information above , let’s say you switched your 250k home loan & you received a net cash return of $1000 (after switch costs). Divide that $1000 into the 250k & it equates to .40%. So in year one you are probably on par with some of those other non-bank lender offers, but in years two & beyond, you will fall behind. This is completed from just a math position & obviously there are other important aspects to lending & each individual’s case should be reviewed on their own merits. I’m simply illustrating that these ‘cash offers’ like ‘honeymoon’ interest rates, could be likened to a ‘Magic Trick’ . Nothing is for free & the major banks are certainly not in the habit of writing business in order to lose money! So take care when looking at these ‘cash back’ offers.