The time is now

GIVEN CURRENT market conditions, now is a great time for borrowers to refinance their existing home loan.

Kathy Cummings, executive general manager, third party and mobile banking for CBA, says brokers need to be aware of this and should be on the lookout for better deals for their clients.

Ms Cummings is quick to point out that a better deal doesn’t always simply mean a lower interest rate; other factors, such as life events and lifestyle should be considered too.

“Borrowers need to be aware of purely shopping on price, as there are many other factors that will determine which is the best overall financial solution for them and their needs,” she says.

“CBA can offer a suite of products to meet almost any customer’s needs flexibly, with more branches (points of sale and service) and innovation through NetBank, CommSec and Kaching.”

According to data sourced from the Australian Bureau of Statistics (ABS), refinancing has grown steadily since March 2013 as borrowers take advantage of historically low interest rates.

David Friend, director at Tiffen & Co and ranked 13th in The Adviser’s Elite Business Writers 2013, says now is a great time for brokers to reassess their clients’ situations to see if there is a better deal out there.

Mr Friend says that in addition to low rates, many banks are now offering cash back incentives to move loans across.

“Right now, there are a number of the bigger banks competing for business by offering incentives to those willing to switch lenders,” he says.

CBA is one such lender, with Ms Cummings saying the bank is offering the incentive as a way for customers moving to CBA to cover the transactional costs of refinancing.

“When refinancing, a customer may face break costs on their fixed rate home loan,” she explains. “They may also face a discharge cost on the mortgage.

“CommBank is currently offering a $700 rebate to customers who refinance from another financial institution, to cover these costs.”

After several years of historically low growth in the home loan market, activity has begun to increase. Since April 2013, the total housing balance growth has increased each month, with particularly strong growth seen in the investor segment.

Peter Gwynne, CEO of Financing Property, who recently placed 24th in The Adviser’s Elite Business Writers 2013 ranking, deals almost entirely with the investor segment, writing owner-occupier loans for his investing clients. He says the percentage of his total business that comes from refinancing has shot up in recent months as investor activity in the housing market increases.

Mr Gwynne says the low interest rates on offer at the moment mean it’s a great time for investors to be looking into refinancing their loan.

“It’s a good time for me to have a look at their situation to see if they can take out some equity if they need, but also just to negotiate a better deal,” he says.

While investing is a great reason to refinance, Ms Cummings says it is far from the only one. Borrowers who are renovating or upgrading should also look to see if they can get a better deal on their loan, as should anyone who has a change in employment circumstances, and anyone who is looking to retire or has recently had a change in family circumstances, such as a divorce or children.

“A customer’s personal circumstances can change, with work, travel, marriage or children. So it’s important to ensure they have a home loan that meets their changing needs,” says Ms Cummings.

It is important to remember brokers need to look at more than the balance sheet, and consider the customer’s current lifestyle as well as any foreseeable changes.

“They should consider how those changes may affect their customer’s finances now and in the future,” says Ms Cummings.

TIME FOR A CHECK-UP

The best way to determine if a client is in need of refinancing is by conducting a home loan health check.

“A home loan health check is aimed at fine-tuning a customer’s home loan and uncovering any potential ways to save money and time,” explains Ms Cummings.

“For example, changing from monthly repayments to fortnightly or weekly repayments, making additional lump sum repayments or increasing the size of regular repayments are all likely to lead to savings, as well as the use of an offset account or a home loan package.

“A home loan health check can also identify savings on fees,” she says.

By undertaking a home loan health check, a broker is able to get a complete picture of their client’s situation, and that means the broker can actually offer a much better service.

“Through the home loan health check, the broker can tailor-make solutions for their customer,” says Ms Cummings.

“By completing a home loan health check, the broker may uncover information that could lead to the recommendation of a more appropriate product for the current life cycle of the customer,” she adds.

Mr Friend says a health check is all about making sure the client’s existing loan is still the best product for their current situation.

“It’s really just looking at their structure and making sure what we set up for them a year ago or two years ago is still working for them.

“We look into any changes in circumstances the client may have had and any future plans or goals they hope to achieve. For example, if they are looking at buying new property, we make sure it’s set up in an appropriate way,” he says.

Mardee Thomas from 1st Street Home Loan Specialists, who placed 31st in The Adviser’s Elite Business Writers 2013 ranking, says she also considers whether her clients are utilising all the benefits of their current product.

“While we do look at the rate they are on and see if we can find them anything better, we also check they are using all the facilities of their current loan to the full capacity,” she says.

“Many products on offer these days come with all the bells and whistles and these can be great if the customer is actually using them, but if they’re not, then we take a look at other options that may be better for them.”

Ms Thomas says she considers rates and functionality to be the two most important factors to consider when selecting products for her clients.

HOW TO SELL IT

Despite the obvious benefits of a home loan health check, it can still be difficult to encourage clients to come in often enough to complete this, or to update their details when circumstances change.

The reality is many borrowers don’t think they have the time for a check-up and simply forget to pass on information.

Brokers need to be proactive in encouraging their clients to participate and to pass on any relevant information.
In terms of frequency, Ms Cummings says she recommends brokers offer their clients a health check every one to two years.

“The frequency of conducting a home loan health check mainly depends on whether a customer’s needs have changed, so maybe one to two years, but of course more regularly if needs change,” she advises.

Refinancing can be a win-win for both brokers and borrowers, and is too important to be overlooked.

Ms Cummings says brokers can sell the importance of refinancing and the need for a home loan health check by pointing out to clients exactly what is at stake – “by pointing out the savings the home loan health check may deliver and the advantages of having the most suitable product for their needs.

“Brokers should start with the customer’s goals and ambitions – from buying a house to starting a family or retirement – and explore the ways to help the customer achieve these,” she says.

Contacting clients on the 12-month anniversary of writing a loan is common practice within the industry and is the perfect time to bring up a mortgage health check.

Ms Thomas says she does a 12-month check-in with all her clients and always sells the need for a home loan health check.

“We do an anniversary follow up. So every 12 months we contact our clients and bring up the need for a health check,” she says.

Mr Friend says he also tries to ensure a 12-monthly health check, but he admits that for some of his clients this is a bit too often.

For those reluctant to come in for a regular 12-month catch up, Mr Friend says it can be best to wait for more meaningful milestones before bringing up the home loan health check, such as the expiry of fixed loans.

“We are always prompted by our CRM whenever a client is on a fixed rate product and the fixed rate terms are coming up for review,” he explains.

“That is one point when we always contact clients, and it’s a great way to get them in for a health check.”

FRONT OF MIND

Ideally for a broker, the client will also take the initiative and make contact when their circumstances change, and this is something many brokers try hard to instil in their clients.

Maintaining an ongoing client relationship is vital to ensuring clients keep brokers informed. To do so, brokers use varying tactics, but all agree it’s about keeping at the front of the client’s mind.

Mr Friend says, “We always make sure our clients are aware we are the first contact point when any changes may occur, or for anything they want to change in their loan.

“They always contact us first and if we can’t assist, we will then direct them to the right person who can – that’s something we instil into our clients from day one,” he adds.

Mr Gwynne says he relies on his customer relationship management (CRM) system to see when his clients are in need of a check-up and as such, puts a lot of effort into keeping his database up to date.

“I am pedantic about our CRM and I make sure it is as up to date as possible. I stress to my clients that when anything changes, we need to know,” he says.

“We have four initial emails we send out to clients and one of these explains the importance and the advantages of making sure we know absolutely everything, so that we can stay on top of things and provide a better service.”

Mr Gwynne says he explains to his clients that only when he has all the information can he make sure they have the best loan for their current situation.

“We encourage all of our clients to get in touch with us whenever their financial situation changes.

“Even things most people wouldn’t consider pertinent to their home loan – like a TV on interest free – we tell our clients we need to know about because it is another debt and it does affect their finance position,” he says.

This strategy allows Mr Gwynne to keep a close eye on his clients.

Any legitimate excuse to contact a client is good. Mr Friend says he has around 20 touch points with each client per year.

“We send out email blasts to our clients once a month with things like industry updates, and we send out a quarterly newsletter that goes out via email, so there are 16 touch points straight away,” he says.

“We also contact clients on their birthdays, and there are other things we do throughout the year for our database, like at Christmas time, for example.”

As well as Christmas, Mr Friend uses events such as the end of financial year to target specific clients.

“At the end of the financial year, we always put out something about investors coming in to review their loans at tax time.

“It’s just about staying in touch with the clients so that when anything happens, we are front of mind and they call us to let us know,” adds Mr Friend.

Ms Thomas says 1st Street has developed a mobile application for its clients as a way to stay front of mind. The app also provides clients with tools and calculators that allow them to perform an initial self-health check.

“We have an iPhone app that we encourage our clients to download so that they can look at different things regarding their mortgage. It’s just another source of information and another way to keep our clients thinking about us,” she says.

“It also has all sorts of calculators so clients can have a look at their repayments – and that can actually encourage them to come in and see us about refinancing.”

Ms Thomas says the app gives her clients a general idea of what they should be paying in the current market.

“If they are paying over and above what the calculator is suggesting, then obviously it’s going to prompt them to get in contact with us,” she says.

REFINANCING REFERRALS

One of the most effective ways to win business is through referral partners.

Mr Friend says a lot of his referral partners are financial planners or accountants, and both are in the perfect position to refer to him for refinancing.

Many accountants and financial planners catch up with their clients each year and look at things like tax or planning for them for the next 12 months.

Mr Friend says, “Part of that process is looking at their financial position, and when they see an opportunity they get us involved to see if we can help them out.

“We don’t really tell them to look out for anything specific, it’s more just that we can be a service to their clients and we try to keep that in our referral partners’ minds.”

Mr Friend says these referral relationships have been easy to forge given it’s a win-win situation for all involved.

“We tell them we are just a fee-free service they can organise for their clients,” he says.

“We do a review of the client’s current position and we liaise with the accountants to make sure we structure it how they want it structured, if they’re the referrer.”

Ms Thomas says she has similar referral relationships that have also been incredibly successful for her. She says she has talked to her referral partners to let them know exactly what type of events can trigger the need to refinance.

“With our accountants, we definitely give them trigger points so that if they see them, they send the clients over to us because that’s an opportunity to refinance and get a better deal,” she says.

NO MATTER which way you look at it, home loan interest rates are near the lowest levels in a generation. As always, the $64,000 question is: Can the super-low interest rates be maintained or even go lower?
On this question, the jury is by no means in agreement.

First, let’s talk about current interest rates. Bank standard variable rates are around 5.95 per cent – the lowest level since the global financial crisis in 2009, when rates fell to the 5.75 to 5.85 per cent region. To find even lower rates you would have to go back to the late 1960s.

So-called ‘discount variable rates’ haven’t been around as long, but current rates are near 5.10 per cent, which is the lowest rate since they were first offered in 2004.

Similarly, fixed-term mortgage rates also recently fell to the lowest levels on record. Unfortunately for borrowers, the lows were only maintained over August and September before edging higher over October. But in broad terms, no matter whether the preference is variable or fixed, borrowers would have few complaints with current mortgage rates.

That’s the easy part – putting current rates in a historical setting. And while the outlook isn’t totally hazy, there are a few complications.

Certainly, the Reserve Bank is unlikely to be lifting the cash rate any time soon. In fact, on the basis of economic growth and inflation forecasts, the Reserve Bank still could cut rates again.

However, with home prices recording solid growth and businesses and consumers more confident about the future now that the election is out of the road, it would probably take a global shock to prompt the Reserve Bank to cut cash rates again.

Certainly, demand for new and existing homes is very healthy, but given the raft of positive influences such as high rental market returns, low interest rates and government grants, that is hardly surprising.

Fixed-term rates are a different issue. Global bond and swap market rates trended higher over late August and into September, on the expectation the US Federal Reserve would start to wind back monetary stimulus. Lenders responded by lifting fixed-term mortgage rates, but the US government shutdown caused the Fed to stay on the sidelines. Bond and swap rates have since moved sideways, so now it is a case of guessing when the Fed will eventually act.

However, given the fact the US economy is indeed recovering, led by the housing sector, the writing is on the wall. It is just a matter of time before the Federal Reserve starts to wind back stimulus. Only US politicians appear to stand in the way. Provided there are no more government shutdowns and debt ceiling issues, longer-term market rates are poised to drift higher over 2014.

So while you could put off the decision to refinance for a few weeks, or perhaps a few months, it’s clear there is a ‘use by’ date on super-low rates.

Craig James
chief economist
CommSec, Commonwealth Bank