Growth in refinancing

The current economic climate is contributing to an upswing in refinancing activity as the pressure of consistent interest rate rises, falling property prices and increased food and fuel costs prompts borrowers to reassess their financial health.

But while there’s little doubt the business is there, winning it may not be as simple as brokers might think.

Rising trend

Australian borrowers are very discerning when financing their homes or investment properties – and the statistics back it up.

Australian Bureau of Statistics (ABS) data collected over the last 20 years shows Australian mortgage holders are not afraid to switch to a better deal if they aren’t getting what they need from their current provider.

Between 1992 and 1999 alone the proportion of home loan approvals that involved refinancing to a different lender jumped from eight per cent to approximately 19 per cent. In 1997 that figure topped 23 per cent.

In the context of today’s market, the three months to April 2008 saw an unprecedented rise in the number of borrowers refinancing their home loans, with a 22 per cent rise in refinancings over that period according to ABS data.

John Flavell, head of broker sales at NAB Broker, estimates that refinancings account for 30 cents of every dollar it earns, a result he says is “hardly surprising” in the current economic climate.

Nevertheless, while refinancings may be plentiful not all borrowers who are refinancing should be considered equal, according to Choice Aggregation Services’ head of sales and marketing Simon Dehne.

“There are a growing number of desperate people out there who’ve found themselves in serious financial trouble,” says Mr Dehne.

He says brokers should not be too hasty to sign up borrowers who are already over-extended and may be a high default risk. Instead, they need to take the time to identify borrowers from whom they can secure reliable business.

Ian Graham, the CEO of mortgage insurance group PMI, agrees. He says it is likely that borrowers who are struggling to meet their repayments with one lender will continue to struggle if they switch lenders – even if the repayments are less.

“It is natural for someone who is experiencing mortgage stress and under pressure with one lender to look for a fresh start with another,” says Mr Graham.

Mr Dehne says brokers need to be on the lookout for borrowers with sketchy documentation and numbers that simply don’t add up.

“It’s better to walk away from business that doesn’t smell right rather than sending it through to the lender on the off chance it might go through,” he says. >>

For brokers, borrowers who are looking to consolidate debt through refinancing generally are at the biggest risk of default.

“Debt consolidation is one to be wary of – unless there is a commitment on the part of the borrower to change credit card or personal loan behaviour,” says Mortgage Choice’s managing director Paul Lahiff.

But NAB’s John Flavell says provided the borrower can meet their repayments – often at a lower interest rate – there can be upsides for both broker and borrower.

“Where it works best is if you have a client who has a short-term debt facility that they were making repayments on regularly,” he says. “If they were to then move that debt into their home loan and to continue making the same repayments they would then cut the debt down and achieve a lower interest rate at the same time.”

Quality reigns

In the current market one of the best sources of new refinancing business for brokers is borrowers that are coming off fixed-rate loans.

Anecdotal evidence suggests the market can expect a significant turnover of fixed-rate loans over the next six months as borrowers who locked in at ‘honeymoon’ rates of 6.5 to seven per cent a few years ago reach the end of their loan periods.

These borrowers will find themselves in a far higher rate environment of around nine per cent, and it’s likely many will be keen to ease the pain by seeking a new competitive rate or product.

“A lot of activity will be centred on fixed-rate maturities,” says Mortgage Choice’s Paul Lahiff.

Mr Dehne agrees, adding that brokers should be keeping their eyes peeled for borrowers coming off fixed-rate terms.

“Anyone who locked in a rate three years ago is probably facing a major jump in repayments so they will be keen to shop around,” he says.

The current downturn in new housing finance could also present opportunities to grow new business as borrowers look to make improvements or build extensions to their existing properties rather than upsizing.

As with all uncertain environments, there are both risks and opportunities. Refinancings can present rich pickings, but brokers should be sensitive to the overall position of the client and ensure only the best quality business finds it way onto their books.

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REFINANCING SNAPSHOT

1. ABS data collected over the past 20 years shows Australians will not hesitate to switch to a better deal if they’re not getting what they need from their current mortgage or mortgage provider.

2. There was a 22 per cent hike in borrower refinancing in the three months to April 2008, highlighting the impact rising interest rates and the higher cost of living are having on borrowers.

3. Refinancing business represents an important revenue stream for banks. NAB Broker, for example, estimates that refinancings account for 30 cents of every dollar it earns.

4. Brokers should look closely at borrowers considering refinancing to consolidate debt – unless there is a fundamental change to their credit card or personal loan behaviour they can quickly spiral into a worse financial position.

5. One of the best sources for new refinancing business over the next six months will be borrowers coming off fixed-rate loans.

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THE RIGHT PITCH

Strategic marketing is essential for brokers looking to attract refinancing business – and it doesn’t have to break the budget.

Refinancing activity is expected to pick up in the latter half of 2008. That means brokers hoping to take full advantage of the upswing need to be proactive in both retaining existing customers while at the same time bringing new customers on board.

“If you’re not out there networking or asking people how they are going, you’re never going to do any business,” says FirstPoint NB’s director and co-founder, Troy Phillips.

Mr Phillips says borrowers who are refinancing present a wealth of opportunities if brokers take the time to work their database and market effectively in their local area.

“A lot of brokers who started in the early days (around 11 years ago) were in their 40s and are passing their prime. If you are marketing yourself in the best area and differentiating the quality of your service there is a great opportunity to grow your customer base at this time,” says Mr Phillips.

The good news is that marketing doesn’t have to cost a fortune. Good relationship building can be far more valuable and effective than costly advertising campaigns or direct mail strategies.

“At the moment people are very sceptical of letter drops, direct marketing or expensive advertising,” says Mr Phillips. “Borrowers aren’t looking for the cheapest rate to buy the biggest property – people are after a solution to affordability.”

Attracting new business

According to Simon Dehne, head of sales and marketing at Choice Aggregation Services, a good strategy is to secure some space in the local paper.

“An article on the current rate market and what’s impacting rate movements will go down well with journalists as well as with the local paper’s readers,” says Mr Dehne. “It could be a good lead generator or just a sound credibility builder for your business.”

Building a reputation as an authoritative commentator and advice giver is a sound way to get your business known in the market. The better you are at translating the language of the lender into simple, everyday language for borrowers, the more likely you are to see business come in the door.

“The more complex and the more difficult things are – that is when people need good advice,” says John Flavell, head of broker sales at NAB Broker.

“Whilst the market might be a little tougher in terms of volumes, there is a great opportunity for brokers to cement their position in the marketplace.”

Connecting with your current customers

Staying in touch with your existing clients and anticipating their needs is the best way to keep them on your books. Customers on variable rates, for example, should regularly be alerted to new products, while those coming to the end of their fixed-term loans should be contacted well in advance to determine their future needs.

“Most borrowers lock in a rate and forget about it,” says Mr Dehne. “If you approach them three months before their fixed-rate ends you’ll have time to engage them and shop around for the most appropriate products moving forwards.”

Mr Phillips also recommends cold calling customers on your database as well as distributing generic material they may find helpful.

“A quarterly newsletter that gives your customers lots of tips and other relevant mortgage information is a great way to remind them that they can come to you for advice and that you can help them with other products,” he says.

Mr Phillips says brokers who are unsure how to approach their customers should take a leaf out of the books of industry leaders. “If you are not looking at what the two biggest players are doing in the market, copying them and trying to do it better, then you are not giving yourself a chance.”

Falling property prices is something mortgage insurer PMI has taken very seriously, with the group changing their LVR maximum for refinancing approximately 12 months ago.

“We’re making sure that borrowers that are refinancing have at least 10 per cent equity in the property, which acts as a buffer margin,” says PMI’s Ian Graham.