Mortgage cashback rationale

spalpeen

Hi all,

Why would banks offer cashback, especially on large mortages? Eg I take a mortgage of 450k and get 2% cashback, that's 9k. Do they really think that handing me 9k is a better deal for them even if their mortgage rate is a bit higher. Even if it's 400 euro a month more expensive, that's still, almost 2 years to recoup the money, but surely most will just change after a year and pocket the 4-5k difference (this is just a rough worked example)? Surely mortgage switching fees will not cost that 4-5k

raxy

Yes, obviously the banks have thought about this more than you have. They know that most people will look at the small picture, I get x back, that will help furnish or renovate lets go for it.

Green rates might change things a bit but possibly don't get the cash back? Im not sure. if you take out a 400k mortgage with EBS the best rate is 3.25%. you'd get 3% back so 12k but over the length of the mortgage the interest is ~ 185k. The equivalent rate with Avant money is 2.45%. The interest on that would be 135k. Thats 38k less after the cash back but banks know that most people will just stay where they so they win.

Obviously, you can take the mortgage, get cash back & switch but very few would go through that hassle. switching takes months & you've to pay for solicitors & other fees. I have seen posts saying some have & switched more than once & made 20k. I've got a mortgage & switched it recently & it was not very pleasant, especially switching which I though should be relatively painless.

Q&A

https://www.boards.ie/discussion/comment/119926574#Comment_119926574

Nicely explained.

Purchasing is stressful and getting a mortgage across the line is often the last piece of a long process. This gives the impression of the mortgage process being worse than what it is. So lenders know most people will likely run a mile then revisit that pain again. So it's all about getting you in the door first time and they feel they will have you for the rest of your mortgaged life. Cashback works for that.

Obviously everyone's experience is different but switching recently would probably be more of a challenge because of the scale of mortgage activity. Interest rate hikes mean lenders are dealing with a lot of internal switches. We're down two banks - which had probably produced a lot of switching as well - so what new business is out there is being funnelled into a smaller number of lenders.

Jim2007

https://www.boards.ie/discussion/2058273524/mortgage-cashback-rationale

Yes, the don't do this on a hunch. It is all modeled and costed including things like the percentage of repossession, customers they will loose etc...

Padre_Pio

I had the option of 2 fixed rates. 2% for 4 years or 2.55% for 5 years. The 2.55 came with 5k cashback so the cost of both was about the same over the 5 years.

I chose the 2.55 to get an extra year fixed (who know what's going to happen between now and then), but I fully expect to shop around for a new mortgage once my term is up.

Switching mortgages is essentially applying for a new mortgage.

spalpeen

Thanks all, I think i didn't really get that switching mortgages was like applying for a new mortgage

Jim2007

https://www.boards.ie/discussion/comment/119937696#Comment_119937696

It's understandable, part of the problem is that the general public does not understand that the term mortgage is a generic term just like car. You can't buy a car, you need to buy a particular make of car offered by the dealers and likewise you can't get a mortgage, you need to get a specific financial product offered by one of the lenders.

micar

https://www.boards.ie/discussion/comment/119937696#Comment_119937696

Yes.....same rigmarole.

I've switched twice ....BOI to EBS and then to AIB.

Henry Ford III

Is Cashback in this instant actually a discount or is it just paying extra over the entire term?

In other words if you declined the Cashback thing what's the upside?

p.s. Remembering always that there's no such thing as a free lunch

AndrewJRenko

https://www.boards.ie/discussion/comment/119939845#Comment_119939845

Am I right in thinking that cashback is actually your own money. They’re just letting you borrow more, which you end up repaying in the long term.

Jim2007

https://www.boards.ie/discussion/comment/119940664#Comment_119940664

I have never seen the models used by Irish banks, but the Swiss ones I have been involved in model these kinds of thing as an overall cost of the product not an individual mortgage. And since the cost is spread over the individual mortgages you are in some way or other paying for it and as it is a shared cost some are probably under paying and some over paying.

Q&A

https://www.boards.ie/discussion/comment/119940664#Comment_119940664

Its a cash payment rather than a bigger loan amount.

Rather than compete fully on price (interest rates) banks entice people in with this up front cash payment. You could reduce your interests cost by putting this cashback towards your mortgage from the beginning. However, the temptation is to use it to kit out the house.

In general the bank will make the cost of the cashback (and more) over the course of the loan. It would be better for most borrower's if lenders competed on interest rate only but they don't.

Of course there are few borrowers who can make it work for them. When rates were low and stable it could be a profitable exercise switching to gain 2%+ cashback each time. In the extreme case a cash buyer could actually make a profit. Say they could afford €200k house with cash. That could get a 90% mortgage (€180k) and would be entitled to €3600 in the form of cashback. If they paid the mortgage off straightway they would have made a profit.