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When choosing a home loan, there are various factors to consider. Two common features that borrowers often compare between loans are interest rates and, when available, cashback offers.
But which one is better for your home loan and for meeting your financial goals? A larger cashback offer and a higher interest rate, or a lower cashback offer and lower rate. Putting aside other factors like fees and charges, offset accounts and credit card packaged loans, let's explore the pros and cons of each option.
Home loan cashback offers can be enticing as they provide a quick financial benefit for owner-occupiers or investors (pending the relevant terms and conditions and eligibility criteria). Usually, a cashback offer involves the lender offering a lump sum payment after settling the eligible loan. It can provide a welcome boost to your finances and some flexibility in managing your expenses.
On the other hand, low interest rates are a crucial factor in determining the overall cost of your home loan. When interest rates are lower, your monthly payments generally decrease (noting of course the difference between fixed rate and variable interest rate loan products). This could save you a significant amount of money over time.
So: which option should you prioritise? It depends on your individual circumstances and financial goals.
If you need quick access to cash, a cashback offer might be beneficial for your circumstances. For example, if you choose to switch banks to access a cashback offer, if you’re eligible, it could provide you with additional funds.
Whereas, if you are looking to save money on your home loan in the long term, you may consider a home loan with a lower interest rate. This usually means you will pay less over time. A lower interest rate means you will pay less in interest charges too. This can result in significant savings over the life of the loan. A lower repayment may mean you are able to pay more off of the loan each month, and might mean more savings and paying off the loan faster.
Here’s an example* of two home loans: Cashback vs Lower-Interest Rate loans.
A $500,000 home loan for 25 years with principal and interest monthly repayments:
Loan
Calculations should be used as an indication only. Use IMB’s Repayments Calculator to do your own calculations whenever you want to compare loan repayments and actions you can take to save more on interest.
In the above example, the short-term benefit of the cashback on a loan with 6.50% interest rate is offset within 2 years by the savings from the lower 6.00% interest rate loan. And the life-of-loan savings of the lower rate is significant: $46K, $43K more than the cashback. You could save even more by paying more than the scheduled repayment amount or increasing the frequency of your scheduled repayments from monthly to fortnightly (if your product type allows additional repayments).
Of course, interest rates will likely change over that 25-year period so the figures in this table would change, and the above example does not consider fees and charges that would apply. But the table illustrates the basic arithmetic when considering cashback offers and rates, and what best suits your circumstances.
Another consideration is the cost of refinancing. This could mean that the savings are less than you expected if the repayments on the new loan aren’t any lower than your existing loan.
It's essential to carefully consider the terms and conditions associated with cashback offers. Some lenders may have specific requirements or restrictions on how the cashback can be used. Additionally, the cashback amount may vary depending on the loan amount or other factors. Review the details, eligibility criteria and consequences before deciding on a cashback offer.
Cashback home loan offers and low interest rate loans both have benefits, and it will be a matter for you to decide what will best suit your circumstances at this time. A cashback offer with a competitive rate is especially appealing.
So, assess your financial needs, long-term goals, and preferences before making a decision. You might also consider consulting a financial advisor who might be able to provide you with valuable insights and guidance tailored to your specific situation. Remember, the right choice is the one that aligns with your overall financial strategy.
Find out more about IMB’s home loans and offers, book an appointment with our friendly team, or start your online application now.
