Members of the broking industry have welcomed the move by NAB and CBA to scrap cashbacks, but have urged others to follow suit to ease the clawback pain.
After the two major banks announced they would be pulling their cashback offers from market in the coming weeks, brokers have been quick to applaud the move.
Echoing the sentiments of the association heads Peter White AM and Anja Pannek – as well as those of aggregation group leaders – brokers have highlighted that removing cashbacks will help reduce the ‘distraction factor’ for borrowers (where the short-term benefit of a cash incentive distracts the mortgagor from a better mortgage product, without a cashback).
However, another important issue being caused by cashbacks is the threat it represents to the longer-term viability of the broker model.
The crux of the problem with cashbacks, is that borrowers may become ‘serial cashback chasers’, resulting not only in brokers facing clawbacks, but also potentially working the same deal repeatedly in a short space time for no extra remuneration.
'A plague of cashback shoppers using and abusing the services of mortgage brokers'
Zippy Financial director and principal broker Louisa Sanghera said an increasing number of borrowers were actively refinancing every three to six months just to qualify for cashback payments of thousands of dollars from lenders.
“Unfortunately, for some borrowers, the offer of supposedly ‘free’ money via cashbacks has resulted in them sometimes signing up to loans that are not the best fit for purpose over the life of their property loan,” she said.
“These ‘cashback shoppers’ are exploiting a loophole that only requires them to stay with a particular lender for three or six months to keep the cash.”
According to Ms Sanghera, the issue is being exacerbated by online cashback groups in which borrowers are “swapping hints and tips on how to secure new cashback deals every few months by using and abusing the services of mortgage brokers”.
“We are just being inundated with clawbacks because of these hordes of cashback shoppers,” Ms Sanghera continued.
“The issue has ramped up over the past year in particular and seems to be growing worse every day with online cashback groups feeding off each other.
“People need to remember we are small businesses making little profit. We are not big banks making millions. We are mums and dads trying to pay our own mortgages ourselves.”
Ms Sanghera estimated that brokers are making a loss by rewriting the same deal, suggesting it costs a minimum of $2,500 to prepare each mortgage refinance application.
“Now we have a plague of cashback shoppers who are wasting our time, and costing us money, because all they care about is getting their hands on some extra cash – regardless of who they have to use to do it.”
Victoria-based broker Bernard Desmond from BLANK Financial said even though brokers are being clawed back, they’re still writing these deals as they can’t afford to lose clients.
He highlighted that he had been working on a refinance deal for a client who will receive $12,000. Given the four-property transaction was written nine months ago, BLANK Financial will be clawed back the original upfront commission.
“Thinking from a customer’s side of things, if their existing bank cannot provide cashback - and neither are they matching the rate – you cannot blame the customer for moving,” Mr Desmond said.
“But thinking from the broker’s point of view, what do you do? You have to retain the relationship and work for free … I completed this four-property transaction nine months ago and now stand a chance of losing it all due to clawback.
“But what can I do? To retain the relationship, I need to work for free. And, if I didn’t do it some other banker or broker will do it!"
Reward borrowers with good products, not cash
“Cashbacks and clawbacks need to stop,” Mr Desmond continued.
“Banks need to reward existing clients for their loyalty rather than buying business by throwing cashback and recovering that from brokers in clawbacks.”
Similarly, Mortgage Choice Peregian Beach broker Gordan MacVicar revealed he completed a double refinance for a client who was paid $8,000 in cashbacks two months ago on a loan that was 100 per cent offset and now wants to refinance again.
“She was paid more than us for the transactions and neither bank will earn any money from the loans. We didn't find out it was going to be 100 per cent offset until after it settled.
“The best way for lenders to compete is with fast service, good rates and products. A race to the bottom is not good for any industry," the QLD-based broker said.
“Cashback money should be redirected to improve service levels.”
Atelier Wealth director Aaron-Christie David agreed, stating: “Brokers have long been calling for a level playing field when it comes to cashbacks and clawbacks.
“The consistent feedback from lenders is that clawbacks are a disincentive to churn clients as the bank doesn’t gain an “economic value” until years three or four of a broker-introduced loan. Yet we have numerous lenders offering cashbacks up to $4,000 that have zero strings attached.
“I personally struggle to comprehend that a client is earning more from a cashback than the broker is paid for example on a $300,000 loan without any clauses,” the Sydney-based broker told The Adviser.
[Related: NAB to scrap cashbacks]