How much did cashback campaign cost banks?

A small share of home loan borrowers benefited from banks competing with cashback offers last year, the Reserve Bank says, and it may have cost the banks around $100 million.

Towards the end of last year, the banks began to compete more aggressively with offers of up to 1.5 percent of the total lending value as a cash back if people brought new business to a bank.

It led to a record surge in switching between banks.

The Reserve Bank noted the phenomenon in its latest Financial Stability Report.

It said the offer coincided with mortgage rates being near their lowest point and a larger-than-normal share of mortgages rolling off fixed-rate terms, which meant borrowers could move.

"Nearly three times the usual amount of mortgage debt switched banks in December, while market shares remained largely unchanged afterwards.

"The offer benefited a small share of borrowers at the expense of banks, although it may be offset by generally higher lending margins. Assuming no offset from higher margins, we estimate the higher cashback offer cost banks around $100 million, which is a small share of their annual profits before tax of around $10 billion."

Commentators such as David Cunningham, chief executive of Squirrel, have suggested the cash back incentives meant higher costs to borrowers overall.

Home loan rates have since risen significantly since that time, from a low of about 4.5 percent for a two-year rate to about 5.2 percent.

Reserve Bank governor Anna Breman said the bank knew it was a tough environment for households.

"What we stress in the financial stability report is that the banks are resilient and able to support both businesses and households throughout this time."

Angus McGregor, acting assistant governor for financial stability, said the bank expected that borrowers and businesses that were struggling would engage promptly with their bank to talk about it.

"And we know in our discussions with industry that that's exactly what the banks want customers to do as well, so they are very open to those conversations."

The Reserve Bank said the housing market generally was still soft.

"National house prices are below their November 2021 peak and have been broadly flat over the past three years. Elevated housing inventories are weighing on house prices, particularly in Auckland and Wellington.

"House prices remain around the top of our estimated sustainable range. While this suggests the risk of a correction is not particularly elevated, rising mortgage rates could reduce house prices further."

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