Return of the cashback?

CBA released a report this week comparing the Australian household sector with other nations reveals that Australia currently holds a record-high debt-to-service ratio.

This ratio, based on the methodology of the Bank of International Settlements (BIS), indicates the proportion of income used for servicing debt among households, non-financial corporations, and the total private non-financial sector.

The report suggest that the combination of increased household debt and a predominantly variable-rate mortgage market has caused the debt service ratio to escalate more rapidly in Australia compared to other regions.

With interest rates having escalated rapidly over the past 2 years, it’s no surprise that the debt-to-service ratio has increased, what is perhaps surprising is our position globally by this measure.

In this week’s newsletter, we ponder whether cashback offers are going to make an unwanted return to the mortgage market with ANZ announcing during the week that they are offering $3,000 cashback to first home borrowers.

Cashback incentives, while seemingly attractive, can pose significant problems for borrowers.

They invariably have strings attached which means the net result may not be financially beneficial to the borrower, and could in fact put the borrower under greater financial pressure beyond the short lived instant gratification of a cash hit.

ANZ this week announced a $3,000 cashback incentives for first home buyers which of course sounds attractive, however you only need to scratch the surface a little so see that the beauty of this offer is very much only skin deep.

The catch.

The main catch with this incentive is the loan type requirement. It is only available with ANZ’s higher interest rate loan offerings. ANZ’s discounted rate home loan has an interest rate of 7.24% however the applicable interest rate under this offer would be 7.44% (assuming a deposit of less than a 20%)

By way of comparison, the below table shows the difference in repayments on a $600,000 loan under this offer compared to the current keenly priced Westpac discount home loan rate.

As you can see, the difference in repayments across a twelve month period erases the cashback benefit.

If we stretch the difference out over 3 years, the cashback benefit is completely eroded and the ANZ loan becomes significantly more expensive.

If you have first home buyer clients considering their loan options, particularly of they involve cashback offers, don’t hesitate to put them in touch with us so we can help them unpack their options.

Variable

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.

1 Year Fixed

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.