How to make $3000 multiply

Mortgage adviser Karen Tatterson says putting banks' contributions on the loan helps pay it off faster. Photo / Doug Sherring

Banks’ cash offers to home owners are better spent on mortgages than holidays

Banks are handing out free money to new borrowers — and if you use it well, you can make it more than five times as valuable.

Most major banks are offering cash contributions with new home loans. ANZ offers $3,000 for new loans over $250,000. ASB has $3,000 for loans of the same size, if the borrower has a 20 per cent deposit. BNZ offers $3,000 if borrowers commit to one other new BNZ product and Kiwibank offers $2,000 to people taking out loans more than $100,000. Smaller players SBS and TSB are also offering cash incentives.

Mortgage adviser Karen Tatterson, a board member of the Professional Advisers Association (PAA), said it's an example of market competition putting money in consumers' pockets. She said it was not a new thing for banks to offer cash.

Many had offered money to cover legal fees, paid when the customer sent in an invoice showing what they had spent on conveyancing.

Now, it doesn't matter what a solicitor costs. The banks pay a flat amount, usually on settlement day.

Tatterson said most buyers saw the money as a bonus. Spent well, it could be worth far more than the $3,000 face value. She suggested people use it immediately to reduce the balance of the home loan. She said if someone had a $450,000 home loan — the average amount of new lending — fixed for two years at 6.49 per cent, and reduced that by $3,000, they would save $17,500 over the life of the loan and shave six months off the loan term.

"Most people are using the money whimsically. They're not thinking about the logic and the value in it. A weekend in Sydney might be a nice thing in the short-term but, if you paid off the mortgage, the long-term benefit far outweighs it."

Property investor Rakesh Ram said he was using banks' cash offers to pay down his mortgage. He's had two this year, for $4,000 and $3,000, and expects to get more as other loans come off fixed terms and he looks to other banks to refix.

"If I don't get a good rate [from my existing bank] I might as well refinance, go with a different bank and get a better rate and $3,000. Apart from the legal fees, the rest will go into the mortgage. I'll pay less interest and save $20 or $30 a month."

Tatterson said it was still important to be sure a loan suited a borrower's situation, and not be swayed too much by the cash temptation.

"As advisers, we would caution borrowers to make sure a short-term win does not distract them from the important things long-term, that is, getting the right home loan with the best fees and structure for their needs."

Bankers Association chief executive Kirk Hope said the cash contributions were a way of building up market share.

"Credit growth remains low at around 5 per cent and is driving strong competition among our banks.

"Cash contributions are one way that banks compete for customers. In this environment banks will continue to work very hard to retain and attract customers.

"That's good news for households and consumers."

Turn $3,000 into ...

• $17,500 if you use it to reduce a $450,000 loan fixed at 6.49 per cent.

• $2,799.80 if you use it to pay down a $10,000 credit card debt that you're paying off at $300 a month.

• $3,571.79 after seven years if you put it in a savings account paying 2.5 per cent per annum compounded quarterly.