Like so many other lessons in life the current mortgage market(ing) frenzy of thousand dollar cash-backs and crazy cheap mortgage rates starting with a 1 are not always as they seem.
This is the first in our two part investigation looking at the current mortgage market and who is offering what and why. And most importantly what it means to you, your mortgage and your family.
1. The Cash-Back
It seems impossible to ignore:
Save hundreds of dollars a month switching to a cheaper mortgage rate PLUS we'll give you $4,000 cash just for the heck of it!
What is not to like here?
To start with, lets look at who is making these offers. The big four banks (and their alternate brands) are the big players in the cash-back game. For the past two years or so the big banks have kept their rates higher than their smaller competitors. Because they already had roughly 90% of the mortgage market and they new that most consumers are lazy (at least when it comes to their mortgage ;) and either wont switch or will take years to get off their backside. So, they were more than happy to take the higher repayments.
Keep in mind these higher than market rates were being charged to their existing, loyal customers. Many of these clients had been with their bank for ten or twenty years and paid their home loans every month. Their properties had increased in value over this time so the banks were siting on relatively small loans with very high security values.
Meanwhile new customers were being offered cheaper rates. As we know newer loans are usually higher geared, meaning the loans were high compared to the security property value. So the riskier loans to new customers were getting cheaper rates than the long-term customers with lower loan amounts?
Bottom line is the big banks with their huge market share reaped huge profits off the backs of their existing, loyal customers. During this time you may remember the Prime Minister, the Treasurer as well as the Reserve Bank Governor imploring the banks to pass on the cash rate drops being given to the banks.
It took some time and a big marketing spend from the smaller lenders but consumers finally started to get the proverbial sh!ts and voted with their feet. At Blue Zinc we saw our normal refinance share of about 21-22% balloon to over 33% (Reduce Repayments on image opposite) for the past twelve months to June and even peaked at a smidge over 40% at one stage.
With their customers leaving in droves the big banks finally, only recently, adjusted their rates. The major banks rates are largely now in line with the rest of the market, with a few notable outliers at both the upper and lower ends of the spectrum. Note: their fixed rates remain oddly higher than their smaller competitors.
Being a big bank with big deposits and even bigger profits they are now going about getting their market share back. Their clever marketing guru's know that many Australians are doing it tough right now. Offering $4,000 cash appeals to many people in our current Covid-19 effected world. They also know that once they have you back in their clutches it won't take them long to gouge that $4k back from you. They will slowly move their rates for existing customers back up above market, they will charge higher than normal late fees or introduce a monthly fee.
All that said, why not just take the $4,000 and run? As all our clients will know, before discussing any finance options Blue Zinc prepares a comprehensive mortgage comparison, which we use as the basis of our conversations with our clients. Below is the summary page of a Blue Zinc comparison showing three good loans not offering a cashback and three mortgages offering the biggest cashback. The cashback is shown as a negative in the application fee row.
The comparison or AAPR rate shows the true interest rate including all the establishment and ongoing fees as well as the cashback. You can see the three without the cashback are by far the cheapest overall. The bottom row shows the comparative savings over 7 years. Taking $2,000 from NAB today will cost you $71,000 (had you chosen AMP).
The above figures are based on an $800k variable home loan. Obviously your circumstances will be different and we would be happy to help compare home or investment loan options specifically for your circumstances. The My Rate Check tool on our website is the perfect staring place to start - simply update and submit your current loan details and we'll send you a comprehensive comparison of similar mortgage products.
The old adage - if it sounds too good to be true, it probably is, certainly holds true when it comes to the banks.
In coming weeks we will look at 'Interest Rates Starting with A 1' and 'The right Time To Fix'.
As always if you have any questions please reach out:
You can even call us on 1300668017
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