Money from the bank vs blood from a stone


Believe it or not, over the last few years it has been far easier getting money out of the bank through cash contributions than blood from a stone. But, as Brendon explains, it’s not always going to be this easy.


If you are a proud owner of a new home loan or even if you have re-financed your home loan from another bank then banks have been throwing money at their clients as an incentive to gain business.


Over the last couple of years, banks have been averaging about a 1 per cent cash contribution, meaning for a $200,000 loan, $2000 cash has been given. For a one million dollar loan, in some situations $10,000 cash has been given.


In an attempt to hold on to their market share, the vast majority of banks have adopted these cash promotions. If one bank gives cash, the other banks will follow, knowing how much of an influence it makes on clients’ decisions. (Interestingly, cash incentives seem to be more motivating to home buyers than having a better interest rate and definitely more of a motivation than ensuring the mortgage is structured correctly ... however, that is another issue!)


Our experience over the last few weeks is that banks are tightening up the amount of cash they are giving. In many situations we are noticing that the amount of cash is almost half of what we were able to source for our clients a few months ago.


The other related development is that banks are now requiring an increase in commitment from their customers. Over the last few months, banks have been making clients sign deeds of “Acknowledgement of Debt” confirming that if the home loan is repaid within a certain length of time, the bank reserves the right to ask for that initial cash contribution back.


Up until now, this deed has been signed particularly for cash contributions over a certain level and mainly for a two-year time frame. But we are now seeing that length of time stretching to three years.


I am not for a minute suggesting that this decrease in cash contribution is collusion. However, our experience is that all banks are now heading in this direction.


So this is just a heads up that our expectations and those of our clients need to adjust to this new reality. In other words, banks are heading a little further towards the blood-from-a-stone end of the spectrum when it comes to cash contributions.


Brendon Ojala is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.