Refinancing - generating new business

According to RAMS Home Loans CEO Melos Sulicich, the key driver of refinancing business is borrowers seeking a better deal.

“There are always borrowers considering their home loan options,” Mr Sulicich says.

Indeed, history shows that refinancing accounts for around one in five loan arrangements every month, with ABS data indicating that refinancing activity tends to bump along at around 20 per cent of total mortgage volumes.

According to the ABS, $3.854 billion in refinancing business was written in March this year – 18.6 per cent of the $20.688 billion in volumes written for the month.

Figures from individual broking groups suggest refinancing accounts for an even greater percentage of all volumes – as much as 30 to 40 per cent in some cases.

March data from AFG, for example, recorded refinancing activity at 32.6 per cent of all deals.

Shifting sands

In times of economic uncertainty and changing monetary policy cycles, refinancing enquiries tend to trend upwards according to AFG general manager of sales and distribution Mark Hewitt.

The statistics support this. The number of loans written for refinancing inched up steadily once borrowers realised rates were on the way down towards the end of 2008, ABS figures show.

In October 2008 refinancing numbers rose by just over 5 per cent from 14,733 to 15,544 and have since hovered at between 15,792 and 16,949.

The credit crunch has certainly had a unique – and ongoing – impact on refinancing activity.

As brokers are well aware, the global financial crisis has forced the withdrawal of many non-bank lenders from the industry in recent months, prompting many borrowers to re-assess their current home loan arrangements.

“We saw a lot of refinancing activity when a lot of lenders pulled out of the market last year and interest rates started to fall,” says Mr Hewitt.

The credit crisis has not only led to a narrower lender and product choice, it has also seen many borrowers move away from non-bank lenders.

“The market for refinancing between lenders has changed significantly in 12 months and the exit of lenders from the broker market has prompted much of the refinancing activity concentrating towards the major banks,” says NAB Broker head of broker sales John Flavell.

Mr Flavell says the perceived security of the major banks in these turbulent times has also stemmed the flow of borrowers between the banks.

“The level of refinancing between banks is significantly lower as customers seek to stay with major banks and the perceived security they provide.”

What lies ahead?

The credit crunch may have narrowed borrowers’ options, but brokers can still expect solid refinancing activity ahead.

Whether it’s borrowers adjusting to tougher economic conditions, looking to free up equity to capitalise on investment opportunities, or simply looking for a better deal, the refinancing market is rich with opportunities for brokers.

Mr Flavell says brokers can expect to see a growing number of borrowers exploring their refinancing options in this market as they re-assess their financial position.

“[These clients will] see the current market as a time to consolidate and restructure their lending[arrangements] to reduce their interest costs, adjust their limits and lock in low rates,” he says.

Mortgage Choice senior corporate affairs manager Kristy Sheppard says refinancing activity is also likely to increase as borrowers look for security in their financial affairs.

“We expect to see a lot more borrowers refinancing into fixed rates for peace of mind over repayments,” says Ms Sheppard.

Even if it involves early exit fees, borrowers locked into high rates may also be considering their options.

“There are a large number of borrowers who fixed portions of their lending at the top of the interest rate cycle,” says Mr Flavell.

“Many of these customers are yet to roll off [these] fixed rate loans... [and] are looking at their options at restructuring to take advantage of lower rates, despite the break costs incurred by exiting a fixed rate loan.”

Securing your share of the refinancing pie

Existing clients are the ideal place for brokers to start when it comes to tapping into the refinancing market.

Peter Smith of Express Finance Options says regular communication is the key to unlocking clients who may be interested in refinancing.

Mr Smith says current clients are more likely to come to a broker who stays in regular contact with them.

“It’s critical to maintain regular contact with clients,” he says.

Keeping in touch with clients also shows you are genuinely interested in them and their needs – the key to building a long-term client relationship.

Freshwater Finance recognises this by having its brokers call their clients at regular intervals.

“We have a call program where we call our existing clients at three, nine and 18 month intervals as well as the three year milestone,” says Sean Richardson, from Freshwater Finance.

“You’ve got to keep yourself relevant so you’re the person your client thinks of when they do want to refinance.”

Mr Smith says touching base with existing clients can also lead to new client opportunities.

“Regular contact with clients helps me retain my clients but it also acts as a trigger for new business,” he says.

“While my client might say they’re fine, they often say they have a friend who could do with a hand.”

When it comes to attracting new clients Mr Smith says free mortgage health checks are a great way to stimulate business.

OUTSIDE THE BOX REFINANCING OPTIONS

Brokers have a number of options for borrowers that fall outside traditional credit criteria.

WITH interest rates on low doc loans failing to keep pace with full doc products, there is an opportunity for brokers to refinance low doc borrowers to more competitive rates.

Murray Cowan, managing director at Better Mortgage Management, says low doc borrowers who have adequate documentation to convert to a full doc loan would find they benefit from a much lower rate if they refinance.

But the reality for low doc borrowers who are ineligible for full doc products is that securing finance has become more difficult – and expensive.

“Twelve months ago interest rate margins... were low and [low doc] rates were not too dissimilar to full doc rates in many cases,” Mr Cowan says.

“However the riskier nature of low doc loans has started to be priced into low doc margins... resulting in higher customer rates.”

Mr Cowan says it is now difficult to source low doc loans above 80 per cent LVR. Where such loans are available interest rates are usually at least 2 to 3 per cent above the standard variable rate.

Loans between 60 and 80 per cent are less expensive but almost all lenders will require borrowers to have held an ABN and be GST registered for at least two years.

Mr Cowan also points out that mortgage insurers will no longer accept low doc refinance applications for investment loans and access to cash out is subject to very tight conditions – if it is available at all.

“To avoid the tighter requirements of mortgage insurers borrowers will need to borrow under 60 per cent LVR where mortgage insurance is often not required,” he says.

In short supply

For some borrowers, changes to credit policy have also made refinancing especially difficult – particularly as a short-term solution.

The credit crisis has meant that a lot of funding for short-term lending is no longer available, making it harder to roll over some loans.

Eurofinance has recently launched a refinancing product for borrowers who are facing refinancing challenges or who are simply looking for a solution to tide them over in the short-term.

While not specifically targeted at non-conforming borrowers, Eurofinance’s product aims to assist those borrowers who, because of their specific circumstances, need to be able to show they can in fact service a loan.

“It’s not that they are non-conforming but they need to demonstrate their ability to repay their loan differently to the main,” Colin Sherry, general manager of Eurofinance explains.

“Our customer doesn’t have full documentation in the traditional sense but they have reasonable assets and a clear credit history.”