Members of the mortgage broking industry have applauded CBA for scrapping cashbacks with its mortgages.
On Tuesday (9 May), the Commonwealth Bank of Australia (CBA) announced it would be ceasing cashbacks with its mortgage products from next month.
The major bank, which currently has a $2,000 cashback offer in market, has previously flagged that the offers being put out in market are resulting in a squeeze on net interest margin. Indeed, CBA chief executive Matt Comyn recently suggested that the strong competition for refinances has resulted in lenders writing loans below the cost of capital.
The bank’s trading update for 3Q23 revealed that its net interest income was 2 per cent lower than the quarterly average of 1H23 and that the bank experienced lower net interest margins largely due to “competitive pressure in home loan pricing and customers switching to higher yielding deposits”.
Given this — and following broker feedback — Australia’s largest mortgage lender revealed that it would stop offering cashbacks from 1 June 2023.
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.”
The bank flagged that it would continue to “offer customers a wide range of flexible home loans with competitive rates”.
Broker industry heads welcome CBA move to scrap cashbacks
Several industry leaders have welcomed the major bank’s move to scrap cashbacks, given they can encourage 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.”
Aggregators have also welcomed the move
Speaking to The Adviser about CBA’s position on cashbacks, the executive chairman of the Loan Market Group, Sam White, commented that it was “a positive move” — both in ensuring that banks are profitable and for supporting brokers and their clients.
He said: “We have always seen cashbacks 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.”
Loan Market’s Mr White flagged 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 were seeing their commissions clawed back and were effectively “continually working for nothing”, particularly if their clients wanted to refinance for cashbacks multiple times.
“If clients wanted to continually chase cashbacks, brokers were 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.
Mr White added that he believed a reduction in cashback would reduce the rapidity in which borrowers refinance, therefore reducing the churn that brokers and banks are facing.
“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,” Mr White said.
“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.”
Mr White added that other benefits of reducing cashback offers would be improved competition, for non-major and non-bank lenders (which haven’t had the same resources to offer such high cashbacks) have been suffering from reduced market share recently. This is believed to be, in part, due to high cashback offers at the majors.
While CBA is the largest lender to remove cashbacks, several others have been pulling their offers from market recently.
NAB’s digital brand ubank, removed its cashback offer at the end of April, with NAB’s cashback now around $2,000.
Speaking last week, NAB CEO Ross McEwan said: “We’ve said that we want to be righting the business at a level of cost of capital but we also want to maintain our customer relationships, so 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.”
[Related: Claws out]