Consumer NZ’s 2024 banking satisfaction survey suggests only 3% switched banks in the previous year, and 84% of us have been with the same one for five years or more. Commerce Commission data suggests 54% of us have never switched banks.
I highly doubt that’s because we think we’re getting a great deal, because of personalised service or because they offer us incentives to stay.
Instead, I’d hazard a guess the biggest reason we stay put is because moving seems like hard work and most of us would rather gouge our own eyeballs out than take on more life admin!
Yet the latest Reserve Bank (RBNZ) data suggests more Kiwis are waking up to the value of switching. Two billion dollars of lending switched from one bank to another in December – the highest amount since the bank started collecting the data in 2017.
I hope it’s a sign of things to come, because there are strong reasons to be bank-disloyal. Here’s why you should consider switching – and what you need to know before you do.
The case for switching
The first and most obvious case for switching is the financial incentive.
As they chase new business, banks will offer an incentive or “cash-back” payment for taking out a mortgage with them. It’s calculated as a percentage of the amount you borrow – that percentage can change depending on how fiercely banks are competing for new business and can vary very slightly between banks. At the moment, brokers tell me that percentage is about 0.9% at most banks, so if you were shifting a $600,000 mortgage, you’d receive about $5400 – which is an amount not to be sniffed at!
It’s possible you might be able to negotiate a slightly sharper interest rate but a smaller cash-back at bank A, but a larger cash incentive and less competitive interest rate at bank B – so you need to run the numbers to determine which one is the better deal.
Another reason to shift might be because you want to do a major restructure of your debt – for example, to extend your mortgage term back out to 30 years (there are reasons why this can make financial sense, I promise!) or to renew an interest-only term on an investment property.
What’s the catch?
There’s always a trade-off – in accepting that “incentive” payment, you’re sort of bonding yourself to that bank for a period of time. Should you toddle off to another bank within three or four years, there’s likely to be what’s called a “claw-back” – which means you’ll have to pay some of that money back. (How much will depend on how long it’s been since you received that payment, as it’s calculated on a pro-rata basis.)
It’s likely the bank you switch to will again be offering a cash-back, but given you’ll be handing a chunk of it over to your old bank, it lessens that incentive. In addition – and this is something many people overlook and has been the subject of complaints to dispute resolution services like Financial Services Complaints Ltd – if you’ve used a broker, you may also get an invoice for the time they spent arranging your finance.
Borrowers don’t pay brokers for their time and expertise, banks do – and if you subsequently refinance within that “claw-back” period, they will have some of their commission clawed back too and may require you to pay them for their time.
You also need to factor in some legal fees. and if you’re a low-equity borrower, it will be harder to switch (and a property valuation will be required, which comes at a cost).
The other thing to consider is your fixed rates. Banks typically charge a break fee to end a fixed loan when prevailing market rates are lower than what you were paying. How much depends on the difference between those two rates and how long was left on your fixed term.
If you have years to run on a large loan at 7%, with rates now much lower, you’d likely be up for a chunky bill. But with most borrowers currently on short-term fixed rates, that may not currently affect you.
But what about that life admin?
The bank application to get approval from a new bank can’t be avoided, but then there’s switching the direct debits, the automatic payments, setting up new accounts, etc.
This is usually where someone will say we need is Open Banking and yes – we do. But in the meantime, there are some measures to make this less painful. You can ask your new bank for a switching-bank request form, fill in your old account details and the date you want automatic payments and direct debits to switch over – and it should happen within five business days.
While there are solid “back-pocket” reasons to consider switching banks, there are also more altruistic “for the good of us all” reasons: the more of us willing to make the banks work for our business, the better it is for competition!
