Home Loan Borrowers Reap Up to $20,000 in Cash Benefits

Home loan borrowers are capitalizing on significant cash benefits when refinancing their mortgages. In June 2023, over 3,500 mortgage holders switched banks, resulting in nearly $2.5 billion in lending. This spike marks the highest level of refinancing activity since records began in 2017, according to Kelvin Davidson, chief property economist at Cotality.

Davidson attributes this surge to many borrowers opting for short-term fixed loans, which typically come with lower break fees. This flexibility allows borrowers to switch lenders without incurring hefty penalties. Davidson emphasized that current mortgage holders are actively monitoring interest rates and terms, indicating a market responsive to changing conditions. He noted, “With a high share of borrowers coming off fixed terms over the next six months or so, it’s possible this switching behaviour may remain elevated for a while yet.”

Refinancing activity is not only on the rise but is also being incentivized by cash-back offers from lenders. David Cunningham, chief executive of mortgage advice firm Squirrel, observed that many borrowers are motivated to switch due to the attractive cash-back incentives available. These incentives often range from $3,000 to $20,000, with borrowers typically receiving around 0.8 percent of their loan’s value as a cash back. For example, on a $1 million loan, this could equate to $8,000, providing a financial boost during the holiday season.

Cunningham remarked that while cash backs were initially used to manage higher interest rates, they are now often spent on immediate needs. “It’s another thing that’s positive for the economy,” he said, highlighting the broader financial implications of these cash-back offers. It is worth noting that these offers are funded by borrowers who do not claim them, which creates a “pass the parcel” effect among banks competing for market share. Cunningham estimated that cash backs and mortgage broker commissions could amount to approximately $30 million in costs for banks in June.

The landscape for refinancing is also shifting due to changing lending conditions. Historically low interest rates in 2020 enabled many borrowers to consolidate loans, which now allows them to refinance without incurring break costs. Glen McLeod, head of Link Advisory, explained that the key question for borrowers is whether refinancing aligns with their financial future. In some cases, switching lenders can offer more suitable products, while in other situations, staying with the current provider may be more advantageous.

As the refinancing trend continues, financial advisers play a critical role in helping borrowers navigate their options. The current market dynamics, driven by attractive cash-back offers and favorable lending conditions, suggest that many homeowners are keenly evaluating their mortgage strategies.

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