Opportunities in refinancing

Furthermore, there was a 19 per cent increase in refinanced home loans for the 12 months to March 2012 when compared with the previous 12 months.

Latest data from AFG reveal similar results: refinancing loans made up 35.8 per cent of AFG’s business in May 2012, making it the group’s best month for refinancing since March 2009.

The benefits of refinancing can be lucrative – it takes substantially less time to refinance a client than to process a new loan application, and in the course of doing so you’re providing a valuable service to the client.

Refinancing existing clients is also far less costly to your business than writing a new loan. Mark Hewitt, general manager of AFG, says it is 10 times more expensive to put a new customer on the books than to service an existing one.
 
However, while refinancing could be thought of in terms of a quick cash injection, brokers need to be honest and upfront about whether refinancing is actually suitable for their client.

Independent Home Loans’ John Whitten says “the main benefit should always be that the client saves money and is placed in a better financial position.

“A lot of the time, I’ve looked at a client’s situation and figured they would be better off not refinancing, and in that case I would never endorse it.”

Is business really booming?
These statistics speak for themselves, but the amount of business actually being carried out in this area varies considerably between brokerages.

Mr Whitten says refinancing only accounts for 10 per cent of his business, while Erik Verheyden from Approved Home Loans estimates 75 per cent of his business is in the refinancing space.

Mr Hewitt says the past 12 months has seen greater competition between the banks than at any time during his career and so now is a prime time to refinance clients.

“The majority of lenders have had their fund positions restored after the global financial crisis, so they’re willing and able to lend,” he says. “The market sort of slowed a bit there, which meant fewer customers to go around, but it’s resulted in better offers.”
 
ASI Capital’s Jeff Herdegen believes now is also a great time to refinance clients in the commercial as well as in the residential sector.

“Despite recent rate cuts from the majors, many institutions in the commercial sector are not following suit,” Mr Herdegen says, “so now is a good time to refinance in order to see which banks really are interested in looking after businesses.”

Rate cuts and exit fees
In the wake of the Reserve Bank’s recent cash rate cuts, many brokers have commented that they’re seeing clients taking much greater interest in checking their own rates.

However, according to Mr Whitten, this isn’t necessarily leading to their seeking to refinance.

“My clients are more concerned with house prices than the interest rates; most sensible people are just keeping the same repayments and reducing the interest by paying off the loan sooner,” he says.

The removal of exit fees has also apparently had minimal impact on refinancing, with many brokers arguing the biggest obstacle in this area is policy, procedure, timeframe and LMI.

“Lender’s mortgage insurance is more important than the government waving a $700 fee because LMI can be up to $10,000,” Mr Whitten says. “Plus, the exit fee only applies to loans [written] after July last year, so I think we’re a long time off seeing people move.”

Aventree Financial’s Emma Cunningham echoes Mr Whitten’s thoughts: “Although exit fees have been removed, consumers need to consider the other costs that lenders charge on entry and exit, such as discharge fees, security release fees, application fees and valuation fees,” Ms Cunningham says.

Targeting refinancers
A sustained marketing campaign can have a very positive effect in the refinancing area, something clearly understood in the case of AFG. Brokers affiliated with AFG are part of a marketing service called Smart, which produces a series of emails during a loan’s lifecycle that brokers can send to their clients.

“It’s essential that a broker takes up a service like this so they stay ‘front of mind’,” says Mark Hewitt. “We found that brokers get caught up in the actual transaction and then move on to the next client, forgetting to do the marketing and customer contact with their existing ones.”

Some brokers, meanwhile, use referrals as the basis for securing refinancing business.

Paradime Home Finance’s Ian Jervis says that although refinancing accounts for 50 per cent of his business, he does no marketing for it.

Instead, he relies on meetings with Business Network International (BNI), a chapter-based business in which Mr Jervis partners with stakeholders from a range of other industries.

“Half of my referrals would come from here or from second-tier referrers,” he says.

Refinancing challenges
Mr Herdegen says the real challenge in this area is getting clients to the point where they can confidently make an informed decision to refinance.

“According to psychologists, people are reluctant to change their financial institution because it validates that they have ‘stuffed up’ by joining their current one,” he says. “This is why there is so much reluctance to refinance.”

If the broker can demonstrate clearly the financial advantages of switching lenders – as well as offering a ‘set and forget’ kind of loan – people can reach the decision to refinance much more easily.

Ms Cunningham adds, however, that it is still important to check what can be done with the current lender and whether the same benefits can be achieved without switching rather than just jumping into refinancing.

“I therefore proactively renegotiate with my existing lenders,” she says. “This is positive for the client because it reaffirms why we went with the lender.”