Humans tend to gravitate towards benefits today rather than future gains. That's become an issue at present as home owners flock to refinance their home loans.
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To get the best deal we have to shop around and change lenders, or ask our current lender for a better deal. Home owners are doing just that, with data from CoreLogic showing as many as six out of 10 property valuations completed in January related to loan refinances.
Refinancing can deliver big savings especially as lenders offer new customers lower rates than existing borrowers. Many are also throwing in a cashback sweeteners worth thousands of dollars.
But do you choose a loan offering upfront cash or a lower rate? A survey by comparison site Finder shows one in four of us would choose the cashback, while 46 per cent would opt for the lower rate. Who is right?
To demonstrate the impact of a short-term over a long-term loan, let's use a traditional 25-year mortgage.
We'll assume two loans - one with the current average variable rate (for new loans) of 2.7 per cent, and another with a rate of 2.8 per cent plus a cashback payment of $3000. The rate gap is just 0.1 per cent but what a difference it can make over a 25-year loan. On a $400,000 mortgage the 2.7 per cent loan with zero cashback could see you pay around $150,500 in interest over a 25-year term.
The loan with the $3000 cashback and a rate of 2.8 per cent comes with a total interest cost of $156,650 over the same period. In other words, you get $3000 cash upfront but pay an extra $6150 in interest, so in the long run you're really out of pocket by $3150.
Experience tells me there a lower rate loan will almost certainly put you ahead over time compared to a cashback deal charging a higher rate.
If you're not sure which is the best option for you, ask your mortgage broker to do the sums.
