Lenders refusing to reprice some borrowers, brokers warn

According to broker feedback, the issue seems to be focused on investor borrowers who hold loans where a property (or several properties) is in trust, and on SMSF loans.

Several banks are being accused of price gouging their existing customers with trust loans (or SMSF loans) by refusing to reprice them to a competitive rate.

While the issue has been impacting SMSF loans for the past few years, the growing number of Australians utilising trusts for property investment has created a new cohort of borrowers who are now finding themselves being left out in the cold.

Around 11 per cent of taxpayers reported trust income in 2020-21, according to Treasury figures.

Who is affected?

It appears that the issue is most prominent with banks that have mothballed loan products that are tied to trusts, and are now unwilling to reprice these grandfathered loans.

Several major banks exited trust lending (including SMSF lending) in 2018 - as they sought to reduce risk and focus on 'simplified' lending ahead of the banking royal commission . However, with rates having changed dramatically since then – borrowers with an SMSF loan or trust loan are finding that they are paying variable rates that are 2–3 per cent higher than market.

This rate differential could be costing impacted borrowers tens of thousands of dollars, particularly for sophisticated investors who may hold multiple properties in trust.

What are brokers seeing?

Speaking to The Adviser, Damian Brander – a former regional manager for Bank of Melbourne business bank and the current managing director of the Australian Lending & Investment Centre (ALIC) – confirmed that banks had a mandated product rule that meant they could not price or discount any grandfathered products.

The refusal by lenders to provide a better rate to these borrowers could, in effect, be leaving investors in a 'trust prison'.

“Borrowers should be very frustrated by this. Take SMSF loans that might have rates of 9.5 per cent, that negates all of the benefits of having it in super. If you think about the contributions and the expected return, 9.5 per cent is close – if not all – of the return expected. It’s really painful,” Mr Brander said.

“Whereas, if the interest rate was 6.5 per cent [ as many non-banks are now offering], the economies of scale work much more favourably in the borrower's favour.”

While broker clients will be able to navigate this issue and find a better deal through their broker, direct clients may not be so lucky.

Indeed, brokers have suggested that the banks are making money by relying on the apathy and ignorance of customers - with some borrowers potentially looking to liquidate as a result of feeling that they have no alternative.

Mr Brander elaborated: “These banks need to consider that the individuals behind an SMSF have to manage the performance of the fund. But the banks have taken away the ability of the individual to manage the fund effectively.”

Similarly, Pink Finance founder and director Nicole Cannon said it had been "very hard to get these loans repriced".

“We have noticed that there is no room or appetite for rate negotiation due to this loan no longer being available on the market. It seems very short-sighted to me and has a compounding effect.

“When a major bank is not willing to budge on their [rate], this creates an unsatisfactory customer experience for our clients. They are very unhappy with their primary institution who may also have their residential banking, credit cards and home loans.

“This creates an opportunity [for brokers] to do a full review on their entire portfolio and to manage all their loans, starting with refinancing of their SMSF/trust loan and then their other loans as well.”

Equilibria Finance broker Anthony Landahl also flagged that it may not be appropriate for the borrower to refinance away due to specific features that are no longer available, or where the loan balance is very low. Moreover, historically acceptable minimum requirements or structures may no longer fit lender policy and original documentation for older loans (such as statement of advice (SOA)) may not be easily available.

As such, being unable to reprice is costing these investors dearly.

“We’ve been actively looking at these trust clients and going through an analysis to see if the product is still appropriate for that client in the long term.

"If we’re not able to get them a better rate then there’s a whole lot of lenders out there that will provide a better rate,” Mr Landahl added.

Non-banks in particular have been moving into trust lending - with Pepper Money, Firstmac, and WLTH all branching into SMSF lending, for example, while other non-banks that have specialised in SMSF for a long time – including Thinktank, Better Mortgage Management, and Liberty – have all been tweaking their offerings.

Ms Cannon advised brokers who are working on refinancing their property trust clients or SMSF clients to ensure they’re across the structure and correct borrowing entities (and speaking to BDMs about them) and doing their calculations to double-check that a refinance is possible.

“Getting these complex loan structures correct can create opportunities for other lending and build clients for life,” she said.

Have you experienced a lender being unwilling to reprice a borrower recently, or any other issues impeding borrowers from getting the best deal? Let us know in the comments below!

[Related: Surging SMSFs]