Client retention trumps loss from clawbacks
A mortgage broker is opposing a call by fellow brokers to end cashbacks, stating that they represent an unexpected benefit for certain clients, if there are other reasons for refinancing to a particular lender.
Head of Zinger Finance Rose Renouf (pictured above left), who is also the business manager at Mortgage Supply, said when the broker retained the client despite them refinancing, it negated the loss of cashflow in situations where a clawback applied.
Renouf’s comments were made as 300-basis points of interest rate rises cause borrowers to seek sharper rates. The desire to refinance is driving increased competition across lenders, with cashback offers used to attract new customers. One recent example was ubank’s $6,000 cashback offer launched on November 10, which has since been updated to $5,000.
Acknowledging that cashbacks are a competitive offer and that such offers come and go, MFAA CEO Anja Pannek (pictured above right) said cashbacks incentivised borrowers to switch loans.
If the switch occurred during the clawback period for a client’s incumbent lender, Pannek said that this could result in a clawback for the broker.
The industry recently spoke out about the negative longer-term impacts of cashbacks. FBAA managing director Peter White identified that client-driven requests to take advantage of cash in the hand created increased due diligence for brokers, who were not influenced by ever-increasing cashback offers. A broker worked in the best interests of the client, and where a refinance triggered a clawback, it represented a “financial blow” to the broker’s cashflow, White said.
But Renouf challenged the idea that cashbacks worked against brokers and created a loss of income.
“Because we deal a lot with investors, normally cashbacks help to defray the expenses for the refinance,” Renouf said. “But for me, cashbacks are only an accidental benefit.”
More to White’s point, cashbacks didn’t form the basis of a decision to change lenders, Renouf said. Refinancing decisions were instead often based around the valuation of that lender, or servicing of the loan.
But Renouf also said cashback offers were not negatively impacting her brokerage. As client care was a priority, clients were retained and clawbacks were not an issue, she said.
“If you can retain your client (even if you get a clawback) there is another set of commission upfront from moving them from one lender to another,” Renouf said.
She said brokers would usually only encounter a clawback if a client was lost entirely, meaning retention was especially important. Providing brokers were in regular contact with their clients, this minimised the risk that they would go somewhere else.
Pannek identified that cashbacks were a feature of the mortgage market and that they had become increasingly prevalent over the last few years. She summed up cashbacks as the result of an “extremely competitive environment” where amid rapid interest rate rises, lenders sought to compete to entice new customers.
Cashbacks were a “competitive offer”, and lenders had different offers at different points in time, she said.
“At a headline rate, they can incentivise borrowers if that is what [borrowers] are seeking, to go and switch loans,” Pannek said.
Clawbacks could apply even where the principles of Best Interests Duty (BID) were upheld and the client received recommendations in line with their best interests, which Pannek acknowledged could be frustrating for brokers.
“The message I have been saying to our members and to people is that the primary role of a broker is to help customers navigate a very complex mortgage market,” Pannek said.
In an increasing interest rate environment, involving a range of lenders and product options, it remained important to adhere to BID, she said.
Despite cashbacks luring customers with a lump sum of money, Pannek said most borrowers understood there was a cost associated with switching lenders. Additionally, there was a cost to the lender in offering the cashback and acquiring the loan.
“When lenders have these offers in market, it is another cost that is eventually built into the overall cost or interest rate of that loan, over the life of the loan. As part of Best Interests Duty, just make it really clear to your customers what costs they have and what the full cost is associated with both switching, and the cashback offer as well.”
In some cases, switching to a lender offering a cashback may be in the customer’s best interests, which should be the primary reason for a switch, Pannek said. She said she was also aware of brokers working with their client’s incumbent lender (who was also keen to retain them as a customer) to find opportunities to negotiate a sharper rate.
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