Banks big home loan cashbacks mask attempts to rebuild margins

OPINION: It’s being dubbed a “cashback war”.

Some banks are offering large sums as cashback after people take a new loan with them.

BNZ is offering up to $20,000 cashback, and state-owned Kiwibank up to $10,000. Westpac is offering a prize draw with five prizes of $50,000.

These are time-limited offers for new borrowers, and mortgage brokers see them as part of a strategy the banks have to rebuild margins on home loans.

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Cashbacks have generally been the province of lower tier car financiers. These were high-cost car loans marketed with the promise of the lender “giving” the borrower both a loan and some cashback to spend on anything they liked.

There’s no such thing as free money, and in my book this was pure exploitation of people in dire need of cash.

By contrast, banks traditionally agreed to pay some of homebuyers’ costs, such as their legal fees, but these new cashback offers are different to those, mortgage brokers say.

The home loan cashback is money banks are paying borrowers after they have drawn down the loan to buy a place. It is not tied to their purchasing costs. It’s an incentive for new borrowers to join the bank making the offer.

Mortgage brokers see the cashbacks as a cunning marketing wheeze contributing to banks’ mission to increase their lending profit margins.

Banks margins were higher in 2018 and 2019 than they are now, though they have done some margin rebuilding since 2020 and 2021, Reserve Bank Te Pūtea Matua figures show.

Cashbacks are designed to attract new borrowers, and lower risk borrowers at that.

The banks have now paused lending to people with less than 20% deposits, one broker say.

The cashbacks of BNZ and Kiwibank are limited to borrowers with 20% or more equity.

That made the cashbacks a gift to moneyed borrowers, including those selling one house and buying another, or simply switching their high-equity home loan from one bank to another.

Not much help to first homebuyers without access to the bank of mum and dad.

Brokers think the cost of the home loan cashbacks are effectively spread by banks across all their home loan borrowers.

That’s because the banks have become reluctant to grant their current borrowers discounted home loan rates.

It used to be that a “good” borrower with a bit of negotiating skill could get their bank to give them discounted home loan rates, for example, knocking 25 basis points off their fixed term rates, and thet could get this discount each time a portion of their loan came up to be refixed.

These days, banks will drop rates to match their lowest big bank rival, if they think a borrower might really up sticks to another bank.

But that’s about it, though they are willing to negotiate on floating rate loans, which remain expensive.

This is why brokers and economists see the cashbacks as being part of a margin rebuilding strategy, helping them lock in future profit-rises.

The Government may well have enabled this strategy.

It has become more gruelling to switch lending between banks, since the Government toughened up responsible lending laws. Combined with people hunkering down in the face of higher costs, and a more nervous economic outlook, there’s not a lot of people switching between banks.

Certainly, brokers are doing less of this switching business than in the good old days before Covid and falling house prices.

Like other special offers to new borrowers, such as the low and no-interest “balance transfer” offers on credit cards, the cashbacks will leave a sour taste in the mouth of banks’ existing borrowers.

Many people are about to refix portions of their loans at much higher interest rates than they have been paying.

They have been enriching their banks for years, and could be forgiven for being irritated at seeing cash being given “back” to the favoured new borrowers.