Cash offers may lead mortgage customers to make poor decisions – ESRI

Study finds consumers are often unaware of long-term implications of cash offers

Mortgage customers may be drawn into making poor financial decisions on the back of cash offers to switch lenders, a study by the Economic and Social Research Institute (ESRI) has found.

With interest rates at record lows, mortgage providers are increasingly turning to cashback deals to entice new customers, but many of these offers can prove more expensive in the long run.

The ESRI’s study to assess how well mortgage holders understand the basic features of mortgages found that many were “initially drawn” to high cashback offers with little or no understanding of the APR (annual percentage rate) implications.

It found that on average consumers preferred €2,200 in cashback to a 0.4 per cent better APR. Yet, for the average mortgage, this amounts to taking out a loan for €2,200 at 24 per cent interest, it said.

The study, which involved 110 people evaluating 24 mortgage offers, found that after reading the official advice, consumers placed much more weight on APR and the long-term savings they could make.

New regulations

“After reading the advice, mortgage holders’ judgments changed. They were much more attracted to APR savings and less enticed by cashback offers,” the ESRI said.

They also became more confident about picking good deals, the institute said, while noting that its findings supported new regulations requiring lenders to direct consumers to this advice.

Nonetheless the research, which was funded by the Competition and Consumer Protection Commission, revealed “potentially serious misunderstandings”, the ESRI said.

When asked what they would need to do to switch, just one third of mortgage-holders were aware that they would need a solicitor and just one quarter that they would need to have the property revalued, it said.


Similarly, most consumers did not understand one or more basic aspects of mortgage products, including how repayments relate to the cost and length of a mortgage, the implications of paying only interest, or the extent of debt liability, it said.

"There are large gains to be had for many families by switching mortgages, so it is encouraging to see that reading official advice improves consumers' decision-making and their confidence," said Shane Timmons of the ESRI's behavioural research unit. "Cashback can be useful, but in our experiment consumers placed too much weight on it until they read the advice. Generally, most people are better off securing long-term savings from a lower APR," he said.

The Central Bank has imposed timelines on lenders to process applications. In addition, the paperwork and the legal fees involved are less than would be the case with original loan applications for a property purchase.

Fianna Fáil finance spokesman Michael McGrath has, however, been critical of the practice of cash back on mortgages, claiming consumers were being hoodwinked by cashback sums into more costly contracts.