We might be only two years into the new decade, but the 2020s are already looking like they’re going to go down in the history books as the era of refinancing. 

When the COVID-19 virus first caused nationwide lockdowns in March 2020, borrowers in Australia were given the opportunity to pause their mortgage repayments and take up relief packages as the country navigated the unprecedented conditions. But once the initial shock subsided, borrowers moved in droves to refinance their loans (see the “Refinance rush” feature from The Adviser’s March 2021 edition). 

As 2021 progressed, refinance rates continued to ramp up exponentially. Indeed, borrower refinancing of housing loan commitments between lenders reached a record high of $17.2 billion in July 2021 after a rise of 6.0 per cent (seasonally adjusted), according to data from the Australian Bureau of Statistics (ABS).

While owner-occupier refinances drove the peak in July 2021, the record figure was surpassed just a month later as investor refinances hit a new record high of $6.5 billion in August, taking the new record volume to $17.7 billion that month. (See graph 1)

The refinancing trend continued into the latter half of the year too, with NSW Land Registry Services data showing that refinance activity in the eastern state in the final quarter of 2021 was up 26.2 per cent year-on-year.

Non-major domestic banks came out on top, ended 2021 with an additional 16,083 mortgages on their books in NSW alone. Brokers have been busy leading the charge for borrowers looking to refinance – particularly looking to institutions outside the big four. According to Australian Finance Group figures for the final quarter of 2021, the proportion of refinance applications being sent to the major banks sunk to near record lows in the final quarter of the year, taking less than half (47.3 per cent) of refinance lodgements from AFG brokers. This figure had been nearly 10 percentage points higher in the same period in 2020.

Noting the figures at the time, AFG chief executive David Bailey applauded AFG brokers for having “navigated the challenges presented by the latest wave of disruption caused by the pandemic to help their customers secure new homes, upgrade their existing homes or take up opportunities to save by refinancing their existing home loans”.

“In a sign of a healthy level of competition, the country’s non-major lenders’ market share is up to 46.5 per cent,” he said, noting that this cohort’s largest market share from AFG brokers was recorded in Q2 financial year 2020 when they reached 46.9 per cent.

Speaking to The Adviser about the refinancing trend, BOQ Group’s general manager, broker, Kathy Cummings, says: “Refinancing activity in 2021 spiked 28 per cent relative to the prior year, with $183 billion in approvals recorded in market.”

According to Ms Cummings, the huge uptick in refinancing has come about through a trifecta of “record low interest rates on offer with many fixed rates in market dropping well below 2 per cent in 2021; a proliferation of refinance cash-back offers in market across both major and challenger banks; and the pandemic prompting many Australians to scrutinise their expenses (with home loan repayments being the largest expense for most households).”

“Extended lock-down restrictions have given Australians the time to act on such reviews by going and speaking to their broker about getting a better deal,” she tells The Adviser. (See table 1)

Refi rush round 2

While the refinance rate has, so far this year, eased from its 2021 peak – it’s still been remarkably high. For example, repricing and refinancing fintech Sherlok reportedly helped save $1.4 million in interest for broker borrowers in January 2022, with the highest amount saved for a home owner being $6,581.

All signs are now pointing to a second surge of refinance activity in the next few months as speculation mounts around an increase in the cash rate. Several economists had touted August or September as the month in which the RBA would first raise rates, however some are now revising their forecasts, outlining that the cash rate may rise as early as June 2022. 

While the RBA’s forecasts have been suggesting that annual underlying inflation will only reach the middle of its 2 to 3 per cent target band by the end of 2023 (revised up from a previous projection of 2024) – the marker that the bank has said will determine when rates go up – RBA governor Philip Lowe has flagged that it is “plausible” that rates could go up this year.

“It is certainly plausible that interest rates go up this year, but we are going to see what the evidence tells us,” Mr Lowe told the House of Representatives standing committee on economics for its hearing on monetary policy in February.

“It may be that participants in financial markets think the evidence is going to come in in such a way that inflation will be higher, stronger and more persistent. They may well be right; we don’t have a crystal ball. They may be right, but our judgement, for better or worse at the moment, is that the evidence of higher inflation is only going to emerge slowly over time.”

The RBA governor outlined this was based on two judgements: that supply-side pressures will gradually resolve themselves and patterns of demand in the economy will normalise; and that the inertia in the labour market would continue.

Mr Lowe also flagged that the last increase in interest rates by the RBA was back in 2010, adding: “So, the vast bulk of people who have taken out mortgages have not had an increase in interest rates (because of a tightening of the Reserve Bank’s rate).

“I imagine when the time comes that will be a shock to people who got used to their mortgage rates falling.”

Indeed, Stephen Jones MP, shadow assistant treasurer and shadow financial services minister, recently told The Adviser that he wants brokers to be focused on helping clients refinance and access better rates moving forward. 

Speaking to The Adviser, he said: “We can be absolutely certain that interest rates are going to rise [over the next two years]. There’s only one way they can go from now; interest rates are going to rise. [When] lenders are going to be changing (and are already changing) their pricing around fixed and variable interest rate loans, we want brokers to be 100 per cent focused on ensuring that everyone on their books has access to the best priced mortgage at a time when we know mortgage rates are going to go up and cost of living pressures are huge... 

“So that’s where we want mortgage brokers to be focused on their customers; getting it right for their customers.”  

GRAPH: EXTERNAL REFINANCING (SEASIONALLY ADJUSTED, VALUES, AUSTRALIA

ABS 5601.0 NEW HOME LOAN COMMITMENTS*

*ABS data is based on commitments that represent loan offer being issued to the customer. 

5 TOP TIPS FOR REFINANCING FROM BOQ GROUP’S KATHY CUMMINGS

1. Have a thorough understanding of the client requirements and objectives – No contradictions improve cash flow versus saving interest.

2. Obtain a client’s comprehensive bureau report upfront to ensure no surprises, with conduct on existing facilities being refinanced and full debt disclosure.

3. Ensure servicing is evident with particular attention being paid to debt-to-income ratios and net monthly surplus meeting the credit policy.

4. Ensure employment history and income verification meet the credit policy and verification policy. If not, take notes.

5. If in doubt, speak with your relationship manager before lodging.