Cashback offers: Do they end up costing you more money?

author-avatar By on August 16, 2021
Cashback offers: Do they end up costing you more money?

Co-founder and CEO of non-bank lender 'WLTH', Brodie Haupt, has warned borrowers to be wary of cashback offers.

Recently, we’ve seen more lenders and financial institutions actively promoting cashback offer schemes as a way to entice Australians to consider their services over competitors, and aggressively generate cut-through in an already saturated market.

These upfront offers can range anywhere from $1,000 to $10,000, depending on the lender.

How can they afford to offer such big incentives?

Most of the revenue and profit lenders make comes from high interest rates and recurring fees charged on home loans, which is why many of them can offer prospective customers cash-in-hand offers to lure them in. 

Is there a downside to 'free' money?

At face value, no, but you should check the fine print. 

While the idea of cashback offers are to help pay off some of the upfront costs of taking out a home loan or refinancing, such as application fees, discharge fees from a previous lender, lender's insurance or stamp duty, it’s completely up to the individual on what they spend it on - if you’re actually being given cold hard cash. 

Many of these deals can provide borrowers with great value and connect them with mortgages with useful features - from attractive variable rates, to offset accounts. 

Not all lenders will offer the cashback offer in cash. Instead it may be in the form of a credit applied against the lenders' fees, a prepaid debit card, or gift card for brands they are affiliated with.

What are the risks involved?

On paper, the idea of getting something for nothing can seem alluring, however, this often isn’t the case.

As with all things in life, nothing is really 'free', and when it comes to cashback offers some lenders or financial institutions can use the opportunity to essentially lock customers into their ecosystem, which can often be expensive, time consuming and exhausting to get out of, if you change your mind.

Cashback offers can be good over short periods of time for those who are prepared to refinance, however in the long term, it could cost the borrower almost six times any savings they made during the lifetime of the loan.

Why? Well, while these advertised rates might seem low, if you look closely, you’ll see that the comparison rate will likely be higher. 

There can be numerous costs associated with refinancing, so to avoid any ugly surprises, it’s crucial that you do your research into what the possible change costs will be, such as discharge fees, valuation fees, economic fees, establishment and break costs. 

Some lenders may provide offsets to incentivise switching providers, but it’s a smart idea to look at when your current contract ends and the advantages and disadvantages of breaking a contract. An easy way to identify hidden costs is to refer to the comparison rate of a loan.

Many cashbacks are also conditional on the borrower locking in other products such as credit cards, or are paid on the condition the customer doesn't switch providers for a set term, which can cost them hundreds of dollars per year in additional fees. 

Is it a ponzi scheme?

Well, not always, but in most cases a borrower is better off opting for a competitive long-term lower interest rate offer than a quick cash grab.  

So, what should you do?

The answer is research. It may not always be worth picking a financial institution or lender and its product just because the sign-up offer looks good.

Speak to friends and family, advisors and most importantly do your own research.

To ensure you're in safe hands, it’s a good idea to consider the different offers, products and lenders available.

Look to pick the one that best suits your risk appetite and needs, even if it doesn’t have a luxurious sign up offer attached.  

The opinions expressed by Mr Haupt do not necessarily reflect those of Savings.com.au, its employees, or the wider group.


Photo by Matt Hardy on Unsplash

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Brodie Haupt is the CEO and co-founder of non-bank lender WLTH.

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