Cash-back offers - is it really free money?

Taking advantage of a cash-back deal when you take out your home loan can be a great way to put some money back into your pocket. But what exactly is a cash-back deal, how do they work, and what do you need to be aware of before you sign up?

What is a cash-back?

A cash-back is a sum of money a lender gives you when you take out a loan with them. Not all banks or lenders offer cash-backs, and the ones that do might not always have this option available.

You can use the money for anything you like, as it is a lump sum paid into your account. Most are advertised to help with things like moving costs, legal costs or new furniture. It’s a great way to have a little extra cash, especially at a time when you might feel like the money is just flying out the door.

It’s a good idea to ensure you use this money wisely. Some people opt to make a lump-sum payment towards their loan, others might squirrel it away as part of their emergency fund, or some may choose to put it towards home improvements.

There are generally two types of cash-back offers:

• Lump sum: which is paid to you as an agreed amount, regardless of your loan size.
• Percentage-based: which is a specific percentage based on the amount you borrow (for example, a 1% cash-back on a 400,000 loan is $4,000).

What to consider

While it’s tempting to opt for the highest amount of cash-back, it’s also important to remember that you need to also look at the terms of the loan. One lender may offer a higher cash-back, but also have higher interest rates than another lender, which could end up costing you more over time.

It’s also important to note that there generally is a lock-in period in order to receive the cash-back. This means that you agree to stay with that lender for a certain amount of time (usually anywhere from 3 to 4 years), and if you leave early, you may be required to pay penalties, including repaying the cash-back amount. It’s important to make sure that the lock-in period actually aligns with your current financial goals so that you can avoid these costs.

How we can help

It’s a good idea to get a mortgage adviser like the team at Loan Market Queenstown on your side. We can help you understand the different types of lending available, and whether incentives like cash-backs are actually beneficial in the long run, or if there are other lending options that might suit you better.

If you are ready to start your home-buying journey, get in touch with our Queenstown-based mortgage advisers. We can help you run the numbers and work out the suitable lending options for your situation.

Book your free, no-obligation appointment with us today.