The move by several lenders to remove their cashback offers from market has been welcomed by the broker industry. But, as we find out, more needs to be done to tackle the clawback issue
A change is afoot. In May, several banks confirmed they would be folding up their incredibly popular cashback offers from market.
The Commonwealth Bank of Australia (CBA) was the first to move — announcing at the beginning of May that it would stop offering its $2,000 cashback offer for borrowers refinancing to it (or its subsidiary Bankwest) from 1 June.
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Cashbacks, while popular, have been resulting in a squeeze on the bank’s net interest margin. Indeed, CBA chief executive Matt Comyn recently suggested that the strong competition for refinances had resulted in lenders writing loans below the cost of capital.
A CBA spokesperson told The Adviser: “Each year, CBA supports hundreds of thousands of Australians to achieve their home ownership and investment dreams.
“Now, in response to customer, broker and lender feedback that in the current economic environment, customers are focused on value, simplicity and certainty, CBA will no longer offer cashback payments on new applications for home loan products from 1 June 2023.”
National Australia Bank (NAB) quickly followed suit, confirming that it would be pulling its $2,000 cashback offer from its mortgage products from the end of June. (NAB’s digital subsidiary ubank had already pulled its cashbacks.)
The cash bonus, available on new refinances of $250,000 or more, will only be available to customers who apply by 30 June 2023 and draw down by 30 September 2023.
NAB CEO Ross McEwan commented earlier this year that he was “not happy” with cashbacks.
“It is a competitive marketplace [and] some of the businesses are feeling like they have to have it to get the business. I’d rather be competing on a service delivery,” he said.
“There is business being written in the bank sub cost of capital. It’s just not a market I’ve chosen to grow in, as we were for the 12 months prior to this period of time.
“I think cashbacks look like they’ve been coming down over the last six to 12 months, which is probably a good thing.”
Removing the ‘sugar hit’
Several industry heads have applauded the move by lenders to repeal their cashback sweeteners, particularly as they have been encouraging clients to ‘churn’ through lenders and have been contributing to higher levels of clawbacks.
Indeed, data from the Finance Brokers Association of Australia (FBAA) has found that lender cashback incentives rose by 59.1 per cent between 2018 and 2021 and have been escalating rapidly recently.
It has found that the average annual clawback value per annum to a broker had surged by 47.4 per cent over the three years, going from $10,229 in 2018 to $15,077 in 2021.
The managing director of the FBAA, Peter White AM, commented: “We welcome this and call on other banks to follow. We would rather see banks provide a commitment to not move interest rates outside of the movement of cost of funds.
“We understand that in some cases, cashbacks bring a benefit to borrowers, but we also know that it can result in borrowers paying more for the total cost of refinancing than they receive in a cashback. We need more transparency from banks not gimmicks.”
Similarly, the CEO of the Mortgage & Finance Association of Australia (MFAA), Anja Pannek, said: “While competition is good for consumers and cashbacks are a product of competition, the increasing use of these types of incentives at heightened levels is not good for the long-term sustainability of our industry. We have been pointing this out for some time.
“Our view is that cashbacks make the overall costs of a home loan less transparent, introduce complexity and, unfortunately, have created downside financial risk for brokers.
“Broker remuneration is structured to address conflicts, ensuring a customer’s best interests are always placed first. Despite brokers living and breathing best interests duty we know brokers have received clawbacks as a result of early discharges driven through cashback incentives. This is unsustainable and unfair.
“What is really important, particularly in the current lending environment, is that our members can continue to help their clients, ensuring they have access to competitive rates. This is about lenders putting their best foot forward.”
Similarly, the executive chairman of the Loan Market Group, Sam White, commented cashbacks have acted as “a real sugar hit which just confused customers as to the real cost of a loan and, in many cases, reduced the life of a loan and encouraged clients to continue to chase cashbacks rather than find a longer-term solution”.
Indeed, he suggested that the average loan term was around five years for a mortgage before 2020, but, in the past year, this has reduced to under two years, as borrowers shop around to take advantage of better rates and high cashback offers.
As such, many brokers have been seeing their commissions clawed back and are effectively “continually working for nothing”, particularly if their clients want to refinance for cashbacks multiple times.
“If clients wanted to continually chase cashbacks, brokers are consigned to doing that extra work for no extra remuneration and that was a sustainability issue impacting the industry significantly. So removing cashback removes that incentive for clients to keep churning,” Mr White said.
“The arms race has been around cashbacks recently, not the long-term interest rate to customers. So I think if more lenders pulled back on offering cashbacks, it would be a more stable competitive market that is less focused on how much cash a borrower can get in their back pocket today.
“And, it would help showcase the value of advice that brokers can give to clients, which is a lot more than just talking about cashbacks.”
What do brokers think?
Several brokers have welcomed the move to moderate the cashback incentives, flagging that some of their clients have become ‘serial cashback chasers’.
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.
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.”
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.”
Indeed, 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 Gordon 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 Queensland-based broker said.
“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.
“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.”
Colin Kidd, owner and broker director of Loan Saver Network, flagged that the clawback issue wasn’t just an issue tied to cashbacks. He highlighted that he believed clawback also needed to be reviewed in the non-prime and specialist space, given that the high level of pricing pressure in this sector has resulted in more borrowers refinancing away to cheaper lenders.
He explained: “The non-conforming space has more inherent issues related to clawback than the prime space. The clawback issues arise from a client’s need for the finance; and how well the finance resolves the issue.”
For example, he said that a client consolidating a tax debt would have their credit issue resolved on settlement of their loan. Then, on lodgement of their next tax return, they could be ready for more competitive pricing in a short time. At this point, the loan incurs a clawback.
“However, a client that consolidates a debt agreement could take some time to be prime ready before a potential clawback event,” he said.
“Some lenders charge clawback and can therefore be more competitive in pricing and offer higher commissions. While other lenders don’t charge clawback, however, to stay profitable, they need to increase their rates and/or offer lower commissions. These clearly result in comparative BID implications. Either way, it is a complex matter for in-depth discussion.”
