Mortgage brokers have warned against mortgage churn in the wake of recent home loan rate reductions following the Reserve Bank’s decision to cut the cash rate last week.
Twenty lenders have announced reductions to their home loan rates in the past week, spurred by the RBA’s decision to cut the official cash rate by 25 basis points to a new record low of 1.75 per cent.
NAB, BOQ, CBA, Westpac, St George Bank, Bank of Melbourne, BankSA, UBank, Greater Bank, ING Direct, Newcastle Permanent, QCPU, Credit Union Australia and Yellow Brick Road announced that they will pass on the full 0.25 per cent reduction to their variable rate home loans, while ANZ and AMP reduced their standard variable rate by 19 and 20 basis points respectively. Bank of Sydney reduced its variable rate for new owner-occupier customers by 27 basis points; Suncorp and Bendigo Bank by 20; and ME by five.
In light of this, a handful of brokers have told The Adviser that while these rate cuts are likely to generate more opportunities for the third-party channel, it is important to take a holistic approach when considering whether a client should move to a different home loan.
“It is important that brokers do not focus only on rate. Good is not often cheap and cheap is not usually good,” Warren Freeman of Cosimfree told The Adviser.
“A lender who might have a ‘special rate’ today but is not consistently competitive may cost the client more to refinance in two years’ time to another ‘special deal’,” he said.
Nancy Youssef of Classic Finance agreed, explaining that good brokers do not just sell on rate but provide tailored credit advice, taking into account the policy and products that best suit a client’s individual situation and financial goals.
Meanwhile, Jane Slack-Smith of Investors Choice Mortgages warned of the implications of mortgage churn, particularly at a time when refinancing activity is booming.
“Clients will possibly see a pattern if every two years a broker is encouraging refinancing without justification to the long-term benefit. By demonstrating this less-than-loyal behaviour, this may in turn be demonstrated by the client base and they won't feel loyalty in staying with the broker,” she explained.
Ms Slack-Smith added that a business based on ‘churn’ is a transactional business, not a sustainable business model.
“If a broker is looking to build their reputation with lenders and clients, then churning is a path to nowhere,” she said.
“A business based on adding value, genuine annual client reviews that allow the broker to ask for referrals and testimonials and the loyalty of clients is one that will be around for the long run, despite rate movements in any direction.”
The 2016 JP Morgan Australian Mortgage Industry report, released earlier this year, found that the number of refinancers looking to transact has continuously increased since early 2015, rising from 10 per cent to close to 35 per cent of the market.
The report also found that approximately 75 per cent of refinancers expect to use brokers.
Digital Finance Analytics (DFA) principal Martin North said a majority of refinancing deals are going to the major banks.
“A proportion of those refinancers refinanced with their existing lender, with around two thirds of the loans actually going to another provider,” Mr North said.
“So there is churn between banks. That doesn’t necessarily create new value from a portfolio perspective but it is moving value between different lenders.”
Mr North noted there are a “lot of very cheap deals out there at the moment well below 4 per cent”, particularly for owner-occupier refinance.
“There is a lot of activity to try and convince people to move from bank A to bank B and from bank B to bank A. So there is a lot of churn, a lot of cost and a lot of activity,” he said.
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