‘There are people with $1m of debt, and every three years they refinance - that’s a holiday to Fiji’

- Some people switch banks every three years to take advantage of cash incentives, says Andrew Chambers.

- Chambers expects the Reserve Bank to drop the OCR by 25 basis points, lowering interest rates.

- Most refinancing occurs when fixed rates expire, with some using incentives for holidays or home upgrades.

Some people switch banks every three years to take advantage of the cash incentives lenders offer to lure in new mortgage customers, says Tella mortgages chief executive Andrew Chambers.

They might get several thousand dollars put into their account and decide to take a holiday, or do up the bathroom, locking themselves into that bank for a specified period before doing it again.

Not everyone strategises this way, but Chambers says advisers have seen a spike in people changing lenders to refinance over the last few months as interest rates have come down in line with OCR drops.

The next OCR announcement comes at the end of the month, and Chambers expects the Reserve Bank to drop another 25 basis points, and for banks to pass on lower interest rates to customers.

“There’s been murmurs about substantial drops on the bank side, but they haven’t happened, so I’m assuming they’re waiting to get closer to the OCR to do that.

Refinancing and switching banks can hand homeowners a cash bonus that can go towards a tropical holiday. Photo / Getty Images

“Personally, I think this side of Christmas we'll see the one-year rate down to about 4.2%.”

That is not quite as low as the current lowest one-year rate in the market, which is 3.99% with SBS.

OneRoof recently reported SBS dropped its one and two-year home loan rates earlier this month to just under 4%, with non-advertised rates of 3.99% for residential owner-occupied properties, the lowest to be offered by a New Zealand bank in four years.

Chambers says market rates are around 4.9% generally, and if he is right and the one-year rate comes down to about 4.2% that will be quite a drop, but one he thinks is on the cards.

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Banks will also drop their deposit rates, he says: “They do drop both sides, otherwise they are seen as gouging, but there’s also competition, and that’s what I think is going to drive it down.

“I think they’re all going to get quite competitive over the summer, so one will go early probably and then the rest will follow.”

Chambers says that while people are feeling more confident because of the dropping rates, that’s not the main reason people refinance.

Most refinancing is undertaken because the term of a fixed rate is coming up for renewal, so people decide to look at which bank is offering the best deal, and some work the system using cash incentives to fund a holiday or pay for an upgrade in the house.

“There are people out there with $1m to $1.5m of debt, and every three years they refinance – that’s a winter holiday to Fiji with the family.

Tella mortgages chief executive Andrew Chambers: “I think they’re all going to get quite competitive over the summer.” Photo / Supplied

“There are definitely those people, and they are the kind of people who would get the Air Points. You know, they are bargain hunters and they don’t mind putting in a little bit of effort, especially when they’ve got a financial advisor doing it for them.”

The fishhook in refinancing with another bank is being locked in with the bank for two or three years, but Chambers knows of people who happily move on to another bank to take advantage of cash offers when that time period is up.

Some might move from one bank to another and then back to the original bank.

“Yep, you can do that. There’s nothing to stop you. The only painful thing is that generally you’ve got to move your savings accounts as well, or the account your income is going into, and that can be a bit of a pain.”

Chambers says sometimes mortgage customers who are already at a bank see their bank offering a cash incentive for others to join and watch on in annoyance, but there is such a thing as retention payments, which a good adviser might be able to get them, although it’s never as much as what is offered to get a customer to join the bank.

“Essentially, they [banks] pay more to get you than to keep you and in the past they haven’t really paid anything to keep you but over the last couple of years we’ve started to see what’s called retention payments and that’s where the bank goes, ‘Actually, we don’t want you to leave, what if we give you X amount to stay?’

Chambers thinks the major banks will drop their one-year rates to around 4.2% before the end of the year. Photo / Ted Baghurst

“Most of that has been driven by financial advisors pushing that for their clients, because sometimes it’s not the right thing to move, and it makes more sense to stay.”

Not all banks offer retention payments, but those that do offer about 0.2% to 0.3% of the loan value as a cash payment that is paid into the customer’s account.

Cash incentives to move to another bank tend to be higher at 0.9% of the loan value.

Chambers says 20 or so years ago, some banks gave away a TV or travel as incentives, or put people into a draw for a car, but nowadays they stick to cash – a $650,000 loan might net someone $6000 to move, which is an attractive amount, he says.

Banks tie people into a set period by saying that if they move again within that time, they will ask for the money back.

That means if someone had a windfall and was able to repay all their debt, they would be penalised, and Chambers says banks don’t tend to pay cash for loans that are 90% so fully leveraged first-home buyers might miss out.

While people can go to the bank themselves to find out about cash incentives, he recommends they get an adviser to do that for them.

“If you go into a bank, there’s a good chance you might get those incentives, you just won’t know whether you’re getting the best option that you could.

“A lot of advisors push for things like retention cash, which is not in their favour, but generally they do the right thing by their client.

“The other thing is you might go ‘I want to restructure because I hate the bank I’m with, they’ve been really picky over something’, and an advisor might say ‘well, actually most of the banks would have done that so it’s not necessarily going to improve your position by going to another’, or they might say, ‘that should never have happened, yep, maybe you should look at changing’.”

What banks offer new customers is cyclical, and when the market is booming, they might not be so aggressive with cash incentives, Chambers says.

He also says most people don’t know banks set their rates on a Monday or Tuesday, so it pays not to lock in new rates until Wednesday.

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