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Brokers have been encouraged to warn clients about the long-term consequences of loan switching reductions amid a sharp rise in refinancing applications.
According to the latest available data from property research group CoreLogic, over 75 per cent of valuations ordered in recent weeks were for the purpose of refinancing.
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In a webinar hosted by aggregator Connective, director Mark Haron noted that borrowers are seeking to capitalise on the low rate environment and lower their repayments in lieu of the current COVID-19 crisis.
“Clearly, this is the opportunity that people are focusing on, particularly in the current interest rate environment,” he said.
“We have very low interest rates, and people are looking to leverage that as much as possible.”
However, Mr Haron urged brokers to warn clients about the long-term implications of refinancing, which may increase the level of interest payable over the life of a loan.
“Keep in mind that if a client is using refinancing as a way of taking some financial pressure off them, make sure that even though refinancing may reduce their repayments, any change in the loan term (lengthening the loan term) would significantly increase the amount of money they have to pay back in the longer term,” he continued.
“It is really important that you outline that to your customers quite clearly so that they understand that.”
The refinancing trend was also recently brought to light in the latest mortgage and competition index from the Australian Finance Group. According to its survey of 3,000 brokers, refinancing applications made up 33 per cent of all home loans lodged in March, up from 27 per cent in February.
CBA repayment changes
The Connective director also made reference to the upcoming move by the Commonwealth Bank of Australia (CBA) to automatically lower aggregate loan repayments for mortgage and business customers, thereby reducing principal repayment levels.
“Obviously, it is going to increase the amount of money that [borrowers] are going to have to pay back to the bank,” Mr Haron said.
“If they were paying extra before, they would be paying the loan off [at a faster rate].”
Addressing brokers, he added: “If you have CBA customers, it is important that you make sure they understand the impacts of moving to minimum repayments.
“If they can afford to, [borrowers] should make use of continuing to make higher repayments to pay the loan off quicker.
“Obviously, with a lot of products, there’s access to redraw if they were to get particularly stuck on these things,” he suggested.
Mr Haron acknowledged that in some cases, it would be necessary to facilitate a short-term reduction in loan repayments.
“It may be necessary for them to adjust to lower repayments as they can right now, knowing that when things return, they’ll be able to increase their repayments and pay the loan a lot quicker, hopefully, once they get back to normal earnings capacity,” he said.
[Related: CBA to move to minimum repayments next week]
