Central Bank asked to examine mortgage cashback offers

The Minister for Finance has called on the Central Bank to examine cashback offers made by banks to new mortgage customers amid concern that many homeowners end up paying more for their mortgages in the long run.

Michael McGrath said the issue is a question for the Central Bank to consider in a submission to its review of the Consumer Protection Code (CPC).

Cashback offers involve the payment of a cash lump sum to housebuyers upon the drawdown of a mortgage with some offering additional cashback at latter points in the mortgage term.

They are a popular option among first-time buyers – who may have limited funds for furniture or redecorating when they buy – but mortgage switchers can also avail of the deals.

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There has been concern over mortgage cashback arrangements for years as customers availing of them can end up paying more over the long term in higher interest rates if they do not switch mortgage provider.

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Competition and Consumer Protection Commission (CCPC) research in 2017 concluded that cashback deals “represent a sophisticated attempt to manipulate consumer behaviour”.

Another CCPC report on a different topic – published last year – included discussion of cashback deals.

It said “customers who avail of cashback tend to pay more over the lifetime of the mortgage, yet it remains a very popular choice among consumers”.

Mr McGrath wrote to Central Bank governor Gabriel Makhlouf earlier this month saying he was “concerned” that customers availing of cashbacks “are paying a higher interest rate for the duration of the mortgage”.

He said: “Cashbacks work well for customers who switch their mortgage after the minimum period and, in doing so, may well benefit from another cashback with a new lender.

“However, the data tells us that the vast majority of mortgage holders do not switch and therefore may well be paying a price for the cashback over time.”

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Mr McGrath added: “A question for the Central Bank to consider is whether, taking into account the inertia we know to be there, the general body of customers are well-served in the round by cashback offers and whether they would fare better overall if banks competed on mortgage rates.”

Mr McGrath told The Irish Times that some mortgage customers were “making the best use of cashbacks”. He said these customers “take the cash upfront at a time when they need it and then switch their mortgage when the minimum period has passed.

“Unfortunately, these customers are in a small minority. In my submission to the CPC review, I have suggested to the Central Bank they should examine what approach best serves consumers generally.”

A revised retail conduct framework is to be finalised next year and Mr McGrath said he looked forward to the outcome of the Central Bank’s work.