The refinance rush

One of those restrictions was to temporarily halt property inspections and in-person auctions. This dented the levels of property purchases in 2020, while vendors postponed listing their properties for sale amid the economic uncertainty.

But while property auctions and purchases went on temporary hiatus – mortgage activity was ramping up.

When we look back at 2020, the theme that emerged as a result of the virus (and consumers’ inward reflection at their financial situations) was this: refinancing. As Cole Kirkby, head of broker at Newcastle Permanent, tells The Adviser: “We certainly saw demand from borrowers for refinancing increase substantially during 2020, particularly building from April after the initial impact of COVID-19 and as interest rates dropped”. 

Indeed, the vast majority of home loan applications were for refinances during the peak of the COVID-19 crisis last year, with broker and aggregator groups reporting record lodgements over 2020, driven by refinance activity.

For example, Australian Finance Group saw a “refinance boom” in early 2020, with applications spiking to a peak of 38 per cent in April 2020. However, this later dropped to more traditional levels of 21 per cent in October, down from 26 per cent in October 2019.

The trend for refinancing remained strong as the year progressed. The Australian Bureau of Statistics’ (ABS) December 2020 lending indicators data revealed that the value of external refinancing jumped 10.3 per cent from the month prior, and up 9 per cent from December 2019.

Mortgage-holders refinanced $11.20 billion worth of home and investment loans during December last year.

NSW – the most populous Australian state – was, unsurprisingly, one of the most active markets for refinancing. According to the NSW Land Registry Services’ (NSW LRS) December 2020 Residential Mortgage Activity report, in NSW alone, mortgage volumes grew 14 per cent in 2020, which was largely driven by refinance activity.

NSW LRS found that refinancing activity rose 22 per cent year-on-year in NSW amid record-low interest rates and competitive cashback offers from lenders.

But the trend has been experienced across Australia. Brokers all over the nation were kept running off their feet with the surge in refinance activity, especially during the peak of the COVID-19 crisis, as they received a flood of requests and enquiries from their clients to refinance their property.

Launceston-based mortgage broker and Up Loans co-founder Carrie Twine tells The Adviser that while around half of her business generally consists of refinancing, she saw demand peaking around March 2020 when the COVID-19 cases increased in Australia.

“It was phenomenal – client after client came in to refinance and enquire about refinancing their home loans,” she says.

Explaining the reason for this surge in demand, Ms Twine says: “Initially, I think it was sheer panic. As COVID-19 hit, there were many unknowns, and people didn’t really know what was going to happen.”

She notes that the panic struck before the federal government had announced support measures for mortgage borrowers, such as temporary loan deferrals (scheduled to expire on 31 March), which enabled them to temporarily pause their mortgage repayments for several months.

Ms Twine notes that demand for refinancing stemmed from clients wanting to secure lower interest rates or consolidate debt to reduce repayment amounts.

She tells The Adviser that while under normal circumstances, people are “so often unaware of what their interest rates are, all of a sudden people became really conscious about their costs”.

In fact, recent research by CoreData (commissioned by Mortgage Choice) had revealed that interest rate apathy is on the rise, with more than half of all home owners unaware of their current interest rate despite ranking paying off their mortgage as their top priority.

However, there was heightened awareness about interest rates during the peak of the pandemic, with mortgage borrowers becoming more conscious about their repayment levels, Ms Twine says.

Refinancing for renovations

Government stimulus measures – such as incentives and grants – also fanned the flames of demand, with lower interest rates stoking demand further.

Once the initial panic settled, Ms Twine says her clients refinanced to renovate their homes, which was spurred by the federal government’s HomeBuilder package.

The original program, which offered grants of $25,000 to owner-occupiers “substantially renovating” or building a new home, was available for contracts signed up to 31 December 2020.

The extended iteration provides a $15,000 grant for building contracts (new builds and substantial renovations) signed between 1 January 2021 and 31 March 2021, inclusive (albeit with different property price caps).

“As soon as HomeBuilder was announced, demand peaked even further to then do refinancing for construction as well,” Ms Twine says.

Newcastle Permanent’s Mr Kirkby agrees, predicting that borrowers will continue to refinance to access funds to complete home renovations, given that the home has increasingly become a place for work and staycations amid COVID-19-related travel restrictions (see page 29 for more).

“With so many of us holidaying at home, there is a real demand to upgrade current properties,” Mr Kirkby says.

“Many customers are opting to borrow additional funds for renovations, taking advantage of some really competitive refinance cashback offers in the market.”

The mortgage prisoner trap

But it’s not just the economic environment that is driving refinancing activity. The lenders’ focus on high cashback offers and record-low interest rate offers is also triggering many brokers (and their clients) to free themselves from their older loans, which may have higher rates.

The final report of the Australian Competition and Consumer Commission’s (ACCC) Home Loan Price Inquiry, released in December 2020, highlights that many Australians with older home loans continue to pay significantly higher interest rates than borrowers with newer home loans, potentially costing them many thousands of dollars over time. It found that many borrowers could save money by seeking a lower rate from their existing lender or switching to a new lender.

To encourage this process, the ACCC has recommended that lenders be required to regularly prompt borrowers whose loans are older than three years to review their current interest rate and to consider the potential benefits of switching products or lenders.

Speaking to The Adviser about the issue, Mortgage Broker Melbourne director and broker Marc Barlow agreed that lenders are often “leaving existing customers on the shelf”, preferring instead to recruit new clients.

“It baffles me as to why businesses don’t want to hang on to its existing customers but want to attract new clients all the time at the cost of existing clients,” Mr Barlow says.

“I would imagine that it’s simply to satisfy their shareholders that they are getting a certain portion of new business. They don’t seem to ever worry too much about retention.

“Maybe the lender thinks it’s swings and roundabouts. They might lose some clients, but they’ll gain some others. The merry-go-round will leave the lender coming out in front at the end of the day, even if they do lose existing clients,” he says.

Mr Barlow offers an example where he wrote a basic variable loan product for a client 12 months ago, which was a “fairly consistently priced loan”, where prices would reduce in line with lower interest rates.

“But I found that when we did the annual review on his loan, he was paying 40 bps more than what a new client would get on that exact same loan today,” Mr Barlow explains.

“That’s [equivalent to] around two rate cuts. That’s the complacency that the lenders are showing at the moment.”

Cashback offers – the cumulative effect

Both Ms Twine and Mr Barlow have experienced clients rushing to take advantage of the cashback offers – often several thousand dollars – in market.

The Up Loans co-founder says that the cashback offers provide incentive for borrowers to switch lenders, who may otherwise be reluctant to change banks and internet banking platforms due to the costs and paperwork involved in refinancing a home loan.

Cashback offers may not only save borrowers money on their interest, they may also cover the cost of refinancing and leave them with additional cash in their pockets, Ms Twine adds.

She says her clients have been using this cash to pay their home loan or put it into an offset account as a buffer (if it is a variable loan), while other clients have used it for home renovations.

However, she says that she tempers clients’ expectations by warning them beforehand (both in writing and through conversations) that banks may take a minimum of four to five weeks to pick up an application, or even longer.

“Service level agreements (SLA) have been one of the hardest parts of being a broker in the last 12 months. It’s not just SLAs on actual assessment time frames, it’s also trying to get things settled once they are formally approved,” Ms Twine laments.

“There is a backlog in getting documents verified and actually getting these deals settled. It can take a really simple sub-80 per cent PAYG refinance application three months from submission to settlement, which is insane.

“You feel like you’re constantly apologising to your clients for this.”

Similarly, Mr Barlow says that these offers have led to a “blowout” in application queues at the banks and have increased application turnaround times.

“Their queues are out to 20 to 30 days now just to get an approval,” Mr Barlow says.

“So, it really has affected a broker, because suddenly those lenders are much less available for the other side of what we do, which is the purchase work.

“You couldn’t possibly go to a lender with a 20-business day turnaround time with a preapproval application, or a purchase for that matter,” he says, adding that there is a 14-day window to secure finance approval.

Talking to clients about refinancing

The Victoria-based broker also tells The Adviser that the high cashback offers can sometimes distract the client from the loan’s actual affordability and suitability, bringing to light the importance of using a broker who is working in the client’s best interests.

Indeed, the implementation of the best interests duty (BID) has underscored the need for brokers to be in constant touch with their clients to ensure that they are securing the best deals and are aware of the loan environment.

Both Ms Twine and Mr Barlow say that they are assiduous about conducting client annual reviews to keep track of their progress once the home loan is settled, including exploring refinancing options.

Mr Barlow says that he frequently uses software systems to monitor clients’ loans, including their interest-only or fixed rate expiry dates and upcoming annual reviews.

“Our standard process is to let the client know that we’re going to be doing a review on their loan,” Mr Barlow says.

“We contact their lender to see what their best rates are, and what else is out there in the marketplace as leverage to encourage their current lender to improve their rate.”

Ms Twine says it is vital to use software and calculators to compare products and show clients “in black and white” what the potential savings opportunities of refinancing could be.

Furthermore, Ms Twine also uses these client conversations as an opportunity to ask for more referrals from her clients.

“For example, if a client thanks me for my service or my updates and communication, I’ll always say to them that the best way to thank me would be to refer me to anyone they know,” Ms Twine says.

“It’s unbelievable how many referrals I do get from existing clients.”

How will refinancing fare in 2021?

A once-in-a-century global pandemic and the resulting economic ramifications in Australia might have driven a surge in refinancing activity in 2020, but it is to be seen whether this trend will continue throughout 2021.

According to a recent broker poll conducted by non-bank lender Resimac on where the volume of growth is likely to come from for brokers in 2021, more than 40 per cent said refinancing would comprise the bulk of new business, particularly from clients who are recovering after the initial lockdown.

From a mutual bank’s perspective, Mr Kirkby says Newcastle Permanent does not foresee the demand for refinancing shrinking in 2021, especially given home lending demand was already strong in December and January.

“Purchase activity across the industry is increasing, including the areas that Newcastle Permanent operates [in], which spans Sydney, Newcastle and the Hunter, regional NSW and interstate,” Mr Kirkby says.

Mr Barlow echoes this view, stating that the demand for refinancing could continue well into 2021 unless lenders become “proactive about client retention”, but added that he cannot “see lenders changing their approach in 2021”.

Indeed, borrowers are increasingly wary of whether a lender would always have their best interests at heart when it comes to refinancing. A recent CoreData survey of 1,023 borrowers, conducted for Mortgage Choice, found that nearly half (49 per cent) of home owners said they felt that banks don’t always have their best interests at heart.

Moreover, 53 per cent were sceptical that banks would provide unbiased advice as to whether they could get a similar or better home loan deal elsewhere when refinancing.

While the research did not quantify what proportion of borrowers believe brokers have their best interests at heart, it did find that the vast majority of respondents (94 per cent) said that they trust loan recommendations made by a mortgage broker.

More than half of those surveyed (55 per cent) said that when it came to refinancing, the number one benefit of using a broker was the professional support given in comparing loan options, rates and features.

Mr Barlow says that mortgage brokers are well placed to assist clients with their refinancing needs.

“Mortgage brokers have never been in a better position to help clients secure the best possible deal,” Mr Barlow says.

“We’ve got all the tools at our disposal to do analysis, and we’re also governed by BID, so we need to ensure that the clients are in the best possible deal at all times.”