Cash back or rate cut; What would you take?
Sovereign has rolled out a very special one-year rate which begs the question what do clients want? Cash or a sharp rate.
Friday, May 15th 2015, 10:52AM
Normally when ASB makes changes to its home loan rates they are mirrored by its subsidiaries Bank Direct and Sovereign (as well as NZ Home Loans). However, last night Sovereign released a one-year fixed rate pitched at 5.10%. It has a number of conditions (see below), but the main one is that it has no no cash contributions.
ASB doesn't advertise cash contributions, but it is doing them below the line and is pretty much matching what other borrowers are doing in the market. It's one-year special is 49 basis points higher than Sovereign and sits at 5.59% (it's card one-year rate is 5.99%).
The Sovereign move seems like a bit of an experiment to see what is more important to borrowers, cash or rate.
Cash clearly has benefits as people love getting money in their hands and also it is an instant reward which is given at draw down time.
However, a sharper rate is often a much better deal for the customer. A key difference is that it's a benefit that accures over time though savings on lower interest repayments, rather than cash up front.
We've done a bit of maths on this to see what how it stacks up. We've picked a loan amount of $280,000 as that is around the average loan size reported by banks.
On an interest-only loan, the fortnightly repayments and annual savings are as follows;
| Interest rate | Fortnightly repayments | Annual repayments | Difference |
| 5.99% | $643.31 | $16,726.32 | |
| 5.49% | $589.61 | $15,329.88 | $1,396.44 |
| 5.10% | $547.73 | $14,240.98 | $2,485.34 |
See how Sovereign's Special compares to other one-year rates
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