Banks align mortgage cash incentives

Personal Finance

Cash contributions 'the currency expected in a home loan offer,' Co-operative Bank boss says as his bank 'meets the market'

20th Aug 14, 11:20am by Gareth Vaughan

<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

The Co-operative Bank has become the last bank, bar HSBC, to advertise cash incentives with its home loan offers in what its CEO describes as a temporary meet the market pricing change.

Co-operative Bank says it'll now "give away" cash of up to $1,500 for loans of between $100,000 and $250,000, and $3,000 for loans of $250,000 or more.

"This is not so much an initiative, as a temporary 'meet the market' pricing change," Co-operative Bank CEO Bruce McLachlan told interest.co.nz.

"We have been the last bank (we think) to formally make cash contributions a core component of our mortgage offer. We have preferred to have a very competitive rate card, rather than offer cash incentives," McLachlan said.

"However, we cannot deny that very quickly cash contributions have become the currency expected in a home loan offer, and customers have trended towards preferring cash now, rather than margin reduction over the life of a fixed term."

"At current bank margins these cash contributions are affordable. (But) we do think that there is very good reason why most banks advise these contributions are 'for a limited time,' as it would be wrong to assume that current margins remain at this level, and what is affordable today may look exceptionally expensive in a year's time. Markets are not always rational however, and swap rates/funding costs are bouncing around by the day," McLachlan added.

Co-operative Bank's move matches the advertised cash offers from ANZ, ASB, BNZ, Westpac and SBS, with Kiwibank and TSB offering up to $2,000 cash with their home loans.

The banks are also offering other non-interest rate incentives, but do have conditions attached to their offers.

In Co-operative Bank's case these include that the cash is only available with new mortgage security where the home loan is equivalent to less than 80% of the property's value.

It's also not available with other special offers, bridging finance, specialty loans or Welcome Home loans.

At the same time as the introduction of its cash incentives the Co-operative Bank has withdrawn its offer of up to $1,000 for legal and administrative costs.

See our page on banks' non-rate home loan incentives here.

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17 Comments

by KH | 20th Aug 14, 12:52pm 1408495949

You get a mortgage and the bank gives you cash as well. Could be useful to pay the legal bill at that transaction time when you are stretched to the limt.

Or. Is it banks just peddling more of the debt drug to the junkies ?

by MortgageBelt | 20th Aug 14, 1:14pm 1408497293

Instead of the cash 'gifts', may as well just lower the interest rate on the mortgage. This will have a higher value longterm - it's a bit like the difference between a one-off cash bonus in your pay compared to a 1% wage rise - the wage rise is for the rest of your job life.

by dtcarter | 20th Aug 14, 3:15pm 1408504503

Except that the any interest rate discount usually expires when the fixed term expires, or for floating between 1-3 years, so it' not like a wage rise for life. You just need to compare the total cash difference between rate + cash over the term.

by RealMe | 21st Aug 14, 8:32am 1408566757

I work for one of the banks here in good ol NZ, managing a lender.

We often talk about the markets etc and I am more exposed to "alternative media/ ideas" compared to their more traditional view on politics/ economics.

How I look at these "cash incentives" are that they are nothing more that covert/mini QE within the NZ sphere of things.

I mean, as we all know that when mortgages are issued numbers are simply punched in on the computer and bob's your uncle you can go and purchase an asset.

Typing in some extra cash 2-5 k simply creates more money which is then spent on whatever, adding somewhat more to inflationary pressures already being exaserbated by hot money flowing in from China etc into our property markets and flowing on to the rest of the markets.

The definition of inflation as I have heard it simplified is "More money chasing the same amount of goods" So with our mass open door immigration policy bring in $$ and $$ from super low interest rate countries, we "average kiwi's" are in, I think, for some huge inflation across the board. Not only limited to housing. Couple this with our dollar crashing back to more realistic levels as US/ world raises interest rates and "recoveries" continue, we are going to be in for a whole lot of hurt. Better buy that big screen tv NOW with you cash from the bank then!! ;)

by MortgageBelt | 21st Aug 14, 1:27pm 1408584476

Deflation, more likely. Households are more likely to save the cash bonuses or repay debt.

by Grant A | 22nd Aug 14, 11:11am 1408662677

MB - you make such statements regularly based on little in the way of facts. Do you understand how rare deflation is since the world move to fiat currencies fully in 1971 - that gave every central banker unlimited money printing ability to avoid it (and rightly or wrongly both politiucans & central bankers think that deflation is the biggest curse and failure that they could make). There has been only one period of global deflation in the last 50 years, it was for one quarter in 2008 at the height of the GFC. One quarter in 50 yrs quickly negated by massive money printing !

Bearing in mind where NZ sits relative to say europe, to be citing deflation in response to someone pointing out some logic around inflation risks is just plain illogical. If the world goes off fiat money and back to the likes of a gold standard, yes maybe, but in the meantime anyone (is there anyone left) listening to your deflation talk is going to be totally lead up the garden path if they're looking at managaing their interest rate risk for instance.

by MortgageBelt | 22nd Aug 14, 3:15pm 1408677334

http://www.economist.com/blogs/buttonwood/2013/06/deflation

"But with low inflation or even deflation, a negative interest rate may be required to provide sufficient stimulus to the economy, whereas nominal interest rates cannot fall below zero. The economy might then become caught in a liquidity trap and a prolonged recession and deflation."

http://larseosvensson.se/files/papers/jep2.pdf

by Grant A | 22nd Aug 14, 3:26pm 1408678000

Which of the dead economies quoted here you are comparing us with; euroland or Japan ? Which apples with which oranges

by MortgageBelt | 22nd Aug 14, 4:12pm 1408680729

Well, which prices are rising in NZ atm which can be suppressed by higher interest rates? Not many, if any.

Then, think, wage increases are at 1 to 1.5% which is below CPI. More low, semi skilled workers are transitioning to minimum wage or pRt time work = less money in circulation per worker/adult.

More household are still paying down debt = less pressure on inflation.

Imported consumer goods are cheaper now than 3 years ago.

House prices are declining in many regional areas and certainly in small towns.

Less money is being spent on petrol per household.

New cars are cheaper now than 3 years ago.

Personal finance is cheaper.

So where are the drivers for inflation? Other than duopoly price-setters that can ignore consumer feedback.

by MortgageBelt | 22nd Aug 14, 10:06pm 1408701976

The other phenomenon is 'shrinkflation' where products, esp food, are getting smaller or inferior but the price remains the same. This brings the opposing forces of inflation and deflation together. The spending capacity cannot be increased (deflation pressure) but the supplier needs to grow the profit (inflation pressure).

Likewise banks are now constrained by the last 4 years of house loan borrowers who are unable to expand their income to match extensive interest rate increases.

by Grant A | 22nd Aug 14, 10:14pm 1408702448

Wages are growing at 1.6%, very slightly above inflation - inflation is growing very modestly. but growing. Its not even falling slightly (disinflation) let alone at risk of falling below zero (deflation). Even if we got some disinflation, its a longway from being deflation. Even the dogs of europe still permit a 0.5% inflation rate overall in euroland, and even although its quite possible for them, we're equally a very very long way from their economc situation

by cowboy | 24th Aug 14, 11:44pm 1408880687

all wages? (growing at 1.6%)

by steven | 25th Aug 14, 7:25am 1408908317

I'll disagree with you here.

However we have had a period of dis-inflation and there is little indication the inflation rate is going to grow much. Consider however that that is with our high exchange rate keeping the likes of petrol prices down. Yes lets look at the EU, they are not allowing 0.5% they who have disinflation if not outright deflation all this 6 years after the "big" event. Sure cherry pick "overall" but really look at how many must be in deflation if the "overall" or average is only 0.5%....then look at the massive youth un-employment that's behind that figure. On top of that wonder on how much bad assets/sdebt the banks in the EU are hiding with the conniving of Govns petrified they'll have to bail them out.

btw,

http://krugman.blogs.nytimes.com/2014/08/23/draghi-at-deflation-gulch/?…

or,

http://krugman.blogs.nytimes.com/2014/08/13/whats-the-matter-with-europ…

NZ isnt a long way away IMHO, we are a 2 trick pony, milk solids and selling houses to each other. The latter selling to the bigger fool isnt sound, its a confidence game. The former is taking a bit of a hit right now, not sure if its deserved but its happening.

regards

by steven | 25th Aug 14, 7:27am 1408908447

If you look at that 1.6% then the sensible Q to ask is if the top earners are doing well, just how badly are the rest and how many ppl are the "rest"?

Oh and that 1.6% suggests little wage cause inflation for the future.

regards

by cowboy | 25th Aug 14, 7:36am 1408908973

exactly. and if a portion of that is forced rises from minimum wage (being pushed up to...minimum wage)...and if it also includes kiwisaver employer and government contribution.... (ie an increase in kiwisaver membership will appear as a wage rise)

and given that our backbone commodity in a commodity driven economy has just had a "record year"

...1.6%? average, then how many are worse off??

by cowboy | 24th Aug 14, 4:30pm 1408854633

You work for one of the banks...(hmm my ex-wife worked for BNZ...and destroy us financially)....

"I mean, as we all know that when mortgages are issued numbers are simply punched in on the computer and bob's your uncle you can go and purchase an asset."

do you REALLY believe that is true? Care to put some cash on it?

by RealMe | 27th Aug 14, 1:13pm 1409102032

"my ex-wife worked for BNZ...and destroy us financially"
Do you mean your ex-wife ruined you financially or BNZ being sold off back in the day ruined the country financially?

I guess I was alluding to the fractional reserve banking system and the creation of money through debt. Obviously the bank doesn't go out to the safe and pop $800k into a bag for you to walk out the door with and buy a house so from that point of view the $$ are just numbers on a screen.

As for your offer, the only gambling I do is leaving my money in a bank account and I kicked that habit a long time ago. OBR anyone?