Refinancing - Riding the wave

In May, more than a third of mortgages for residential property arranged nationally through Australian Finance Group (AFG) were for refinancing purposes.

In fact, refinancers accounted for the largest piece of the lending market in May at 38.0 per cent, according to AFG's latest mortgage index, followed by investors at 36.7 per cent, upgraders at 15.4 per cent and first home buyers at 9.9 per cent.

But it is not just AFG loan figures that highlight how significant refinancing dollars are to brokers in the current market.

A SIGN OF THE TIMES

The findings from the latest The Adviser Q2 2010 sentiment survey clearly reveal where brokers expect the smart money to be over the coming period, with the refinancing sector tipped to be most active.

More than 50 per cent of brokers believe refinancing will account for the largest share of their volumes moving forward.

There is little doubt that the rising rate environment has driven much of the current refinancing activity with borrowers responding to interest rate differentials between lenders by shopping around for a better deal.

The significant gap between the majors' standard variable rates that has stood now for over half a year has doubtless prompted borrowers to look closely at their own mortgage rate to see if there is a better deal available elsewhere.

But refinancing activity is not down to interest rate differentials alone.

A recent online poll conducted by The Adviser has found that there are three main drivers for refinancing activity, and the results were interesting.

In mid-July brokers were asked what the number one reason was behind why their clients refinanced. Of the 325 respondents, at the time of printing debt consolidation scored highest with 37 per cent of the votes, followed by refinancing for a better rate

(29 per cent) and releasing equity (26 per cent). The remainder of the respondents was unsure.

Non-bank lender Carrington National's managing director Gino Marra says most brokers would have experienced an upswing in consolidation refinancing activity in recent weeks and this has certainly been reflected in the business he has been assessing.

According to Mr Marra, 80 per cent of home loans written by the company are for refinancing, a fact he attributes to the current economic climate.

"Buyers are finding that they are overcommitted," Mr Marra says.

"They are looking to save money by consolidating their existing home, car and personal loans, for example."

There is little doubt that six rate rises over a 10 month period has caught some borrowers napping, and they are now feeling the squeeze. Those with poorly structured debts will no doubt be feeling the heat from higher interest debts, such as credit and store cards.

INVESTORS DRIVING DEMAND

But there are also positives that are driving refinancing, and brokers have a clear opportunity to tap into the burgeoning investor market as well as helping their clients restructure their finances.

A red hot investor market has turned the head of many a home owner and the first place to drum up funds to tap into the property market is usually derived from equity sitting in their family home.

This is certainly a trend that Greg Hearn, principal of broker group First Chartered Capital, has seen in his business.

"Most of my refinancing activity is coming through my investor clients.

"They are building a little bit of equity in their property and then refinancing so that they can buy another property.

"Investors are starting to fill the gap that was created by first home buyers," Mr Hearn says.

Surging rental values over the last few years, combined with rock bottom vacancy levels in many markets, has proved to be the perfect cocktail for an investor boom.

Mix that up with low interest rates, compared with pre-GFC levels, and it's easy to see why investors have flocked back to market.

Investors continue to form the backbone of new business activity in the property market, a recent report has found.

According to PRDnationwide's Quarterly Economic & Property Report, investors now account for 36.8 per cent of all financial housing commitments in Australia - the largest amount since December 2003.

In addition, investor financial commitments have now eclipsed $8 billion - big business for brokers to tap into.

PRDnationwide research director Aaron Maskrey said on a state-by state basis, Victoria recorded the highest number of dwelling commencements during the March quarter, representing 34.0 per cent of all

national dwellings.

"It is anticipated that dwelling investment will grow by 7.5 per cent during 2010 to 2011," Mr Maskrey said.

According to Mr Maskrey, this is not unrealistic growth given that the median house price in Australia climbed on average by 12.1 per cent over the quarter ending May 2010. The national average median house price now sits at $468,000.

Melbourne recorded the biggest increase of 18.2 per cent while Darwin prices rose 16.8 per cent. Perth recorded the smallest increase of 6.1 per cent over the May quarter, where the median price currently sits at $475,000.

IN SEARCH OF A BETTER RATE

While investors and debt consolidators account for a large share of the market, there is still considerable activity among borrowers looking to refinance for a better rate.

With over a quarter of brokers expecting rate differentials to drive the greatest share of their refinancing business, there is certainly a significant opportunity in this segment - however brokers should proceed with caution.

NAB Broker's general manager John Flavell says while rates are a contributory factor, they should not be the sole reason for refinancing a loan.

"I question the motive of borrowers who want to change their home loan product or lender just because interest rates have gone up," he says.

Borrowers should not view rising rates in a vacuum. Rather, Mr Flavell says brokers should encourage borrowers to realise that there are many indicators that can determine whether a borrower is better off switching home loan products or lenders.

This is certainly a philosophy that is reflected by brokers.

"I don't like to refinance my clients, I'm just not a fan of it," says Core Mortgage Brokers' principal Peter Wotherspoon.

"If I go out to see a client that is looking at refinancing, I try to keep them with that bank. I will negotiate a better rate on their behalf.

"I am not a big churner of business. While some may argue that this would cost me business, I think my clients will see that I am doing it for their benefit and thus be grateful."

But there are still plenty of borrowers on the lookout for a better rate as repayments bite deeper into the hip pocket.

Barnes Home Loans executive director Janelle Rayner says that in most instances, rising interest rates are a catalyst for change.

"Borrowers are very rate conscious and much more educated in what's available in the market place," Ms Rayner says.

But Ms Rayner warns that licensing could well play a significant factor in determining the future of refinancing.

According to Ms Rayner, the new legislation will test responsible lending, and this could impact the kinds of refinance loans that are recommended to clients.

Ms Rayner anticipates that depending on a broker's offering and quality of recommended products, some brokers will experience a slide in refinance activity, while others may experience an upswing.

"What constitutes unsuitable lending is yet to be tested and some brokers may be reluctant to refinance customers until we fully understand the legislation," Ms Rayner says.

"On the other hand, if there are cuts to mortgage exit fees, that factor may promote more refinancing activity, but many non-bank lenders competitiveness will be impacted, so there may be less choice available when it comes to refinance products," she says.

KEEP CONNECTED

So how should brokers tap into the refinancing market - without risking the appearance of encouraging churn?

For mortgage broker Greg Hearn, the answer is simple: "The key to refinancing is to stay in touch with your clients".

Mr Hearn sends fortnightly newsletters to keep both past and present clients up to speed with exactly what is happening in the economy.

"Importantly, I like to send a newsletter straight after the RBA makes its monthly interest rate announcement. But, instead of just saying ‘this is what has happened', I like to give a little bit of analysis around the RBA's decision," he says.

With a focus on adding value by delivering information and education, Mr Hearn has built a relationship of trust with his clients, and through this he paves the way for borrowers to come to him.

"If rates go up, I like to explain to my clients what this could mean for them and their finances.

To underpin regular client communications brokers should also ensure that they are on the ball with some of the more basic client retention activities that ensure they are top of mind with their customers should the need to refinance arise.

Christmas cards and birthday cards, and even a personal call to customers six months after settlement, can be highly effective.

The more contact you have with your clients, the more likely they will be to use you for their repeat business rather than straying in to a bank branch for a cheaper advertised mortgage rate.

"I also make yearly phone calls just to see how they are travelling and if their financial needs have changed at all," says Mr Hearn.

I really don't like to refinance my clients. Ultimately, I would prefer to put them in the right loan the first time, every time.

"Depending on rates and other economic factors, sometimes refinancing is hard to avoid.

Intelligent Finance's managing director, Justin Doobov, agrees that existing clients and word-of-mouth referrals are the best avenue for targeting borrowers that are looking to refinance, however he stresses that a good loan is not just about the rate.

"A good broker can offer their client a better loan structure, and this could save the client thousands of dollars over the long term," he says.

According to Mr Doobov, while 99 per cent of clients walk in the door wanting their broker to offer them the best interest rate, the key to good service is being able to educate the client perception and help them understand the benefit of choosing a loan with the right structure. Mr Doobov says such quality of service takes a little more time than simply offering a client the cheapest rate on the market, but taking that time from the outset has a huge pay-off.

"A client who has just saved $10k in tax by refinancing their loan is the type of client who will mention your name over the dinner table to their family and friends," he says.

"They are the type of client who will give you a referral."