Low rate or cashback offer?

As competition between lenders heats up, some are offering cashback payments of up to $5,000 when you refinance a home loan. But does it offer good value?

"Get up to $5,000 potentially"

To demonstrate the impact of a short-term deal over a long-term loan, let’s use a traditional 25-year mortgage to see the real cost.

We’ll assume two loans – one with the current average variable rate (for new loans) of 4.5%, and another with a rate of 4.6% plus a cashback payment of $3,000. The rate gap is just 0.1% but what a difference it can make over a 25-year loan.

On a $400,000 mortgage the 4.5% loan with zero cashback could see you pay $266,968 in interest over a 25-year term. The loan with the $3,000 cashback and a rate of 4.6% comes with a total interest cost of $273,828 over the same period. In other words, you get $3,000 cash upfront but pay an extra $6,860 in interest, so in the long run you’re really out of pocket by $3,860

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Don’t get us wrong, we think utilising a cash back to pay for refinancing fees is a useful strategy, however it’s important to not let it be the driving factor. A low rate over the life of the loan trumps a cash back every day of the week.

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E.G. I want to 'buy a new property', 'refinance', 'buy an investment property'...

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