Refinance
Refinance Cashback Explained: How These Offers Really Work
Refinance cashback explained: see how cashback offers work, how to weigh a home loan cashback against the rate and fees, and the costs it needs to cover.
A refinance cashback is a lump sum a lender pays you for moving your existing home loan across to them. It is a marketing incentive, not a discount on your loan, and the amount on offer changes from lender to lender and over time. A cashback can be useful, but whether it leaves you better off depends on your circumstances and the lender’s criteria, because the cash is only one part of the total cost of switching.
This guide walks through what refinance cashback offers are, how to weigh a home loan cashback against the rate and fees, and the questions worth asking before you switch. The figures here are general information, not advice about your situation.
What a refinance cashback offer is
When you refinance, you replace your current home loan with a new one, usually with a different lender. Some lenders attach a cashback to that move: once your loan settles with them, they deposit a set amount into your account. The offer is designed to win your business, which is why refinancing cashback offers come and go and vary widely between lenders.
The cash itself does not change your interest rate or your repayments. A loan with a headline cashback can still carry a higher rate or more fees than a loan without one. That is why it helps to look past the cashback and compare the full cost of each loan. If you are weighing up a switch, the rate, costs and lender choices come together on our refinance home loans hub.
How to compare the full cost, not just the cash
The most reliable way to compare two home loans is the comparison rate. A comparison rate is a single figure that shows the cost of a loan, including the interest rate and most fees, so you can compare loans on a like-for-like basis. A cashback does not appear in the comparison rate, so a loan with a generous cashback and a higher comparison rate could cost you more across the life of the loan than a loan with no cashback and a lower comparison rate. Our comparison rate explained guide goes deeper on what the comparison rate does and does not capture.
Interest rates differ more than many borrowers expect.
Over a typical loan term, a difference like that can outweigh a one-off cashback many times over, which is why the rate usually matters more than the cash.
Try the rate check calculator
Open the calculator to run your own numbers.
Run the rate check calculator to see how your current rate stacks up before you factor in any cashback.
The switching costs a cashback has to cover
A cashback can help offset the costs of moving lenders, so it pays to know what those costs are. According to Moneysmart, switching a home loan can involve the following.
| Cost | When it applies |
|---|---|
| Discharge or termination fee | When you close your current loan |
| Application fee | An upfront fee when you apply for the new loan |
| Break fee | If you close a fixed rate loan early |
| Switching fee | If you refinance internally with the same lender |
There can also be government charges to verify with your lender. If your equity has dropped below a certain level, lenders mortgage insurance can come into play as well, which we cover below. Add these up and compare them against the cashback. If the costs are close to or larger than the cash, the cashback is doing less for you than it first appears.
Equity, LVR and lenders mortgage insurance
Your equity is the share of your home you own outright. Lenders look at the flip side of this, your loan-to-value ratio (LVR), which is the size of your loan against the value of your property. The more equity you hold, the lower your LVR.
Moneysmart points out that holding a minimum of 20 per cent equity strengthens your negotiating position and can help you avoid lenders mortgage insurance (LMI). LMI is insurance that protects the lender, not you, and it can be required when your equity falls below 20 per cent. If refinancing would trigger LMI, the cost of that insurance may outweigh any interest savings or cashback, so it is worth checking your equity position early. Our guides on how to avoid LMI and LMI cost explained go deeper on this.
Who may qualify for a refinance cashback
Eligibility for any refinance cashback sits with the lender, and the rules change with each offer. As a general guide, lenders tend to set conditions such as a minimum loan amount, a maximum LVR, the loan being for an eligible purpose, and the loan settling within a set window. Some offers exclude internal refinances or apply only to owner-occupier loans. Because the fine print differs every time, the only reliable answer for your situation comes from checking the specific offer’s terms and confirming them against the lender’s criteria.
Steps to weigh up a cashback offer
A clear way to test whether a home loan cashback is worth it.
Moneysmart suggests using a mortgage switching calculator to work out your net saving and how long it takes to break even on the switching costs. That break-even point tells you when the move starts paying off.
A quick worked example
Say two loans are on offer. Loan A has a $3,000 cashback and a comparison rate that is 0.30 per cent higher than Loan B, which has no cashback. On a large balance over many years, that 0.30 per cent gap in cost can add up to far more than $3,000. In that case the loan with no cashback could leave you better off. The numbers depend entirely on your balance, term and the actual rates, which is why running your own figures, or asking a broker to, matters more than the size of the cashback.
Talk it through with the team at Finance Lab
A cashback can be a genuine bonus when the underlying loan is right for you, and a distraction when it is not. If you would like help comparing refinancing cashback offers against the full cost of each loan, the team at Finance Lab can run the numbers with you and explain the trade-offs in plain terms. Reach out and we can look at your options together.
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