Refinancing predicted to increase over next 2 years

Noting the new records, Adam Grocke, the CEO of AI-based refinance comparison platform Sherlok, said he believes that Australia will continue to see an increase in refinance activity over the next 12 to 24 months due to three particular factors.  

The first of these is due to the cooling of the real estate market from its current hot status. 

“At the moment brokers are the busiest they have been in the last 10-15 years and to handle the increased volumes they are recruiting more brokers and team members to support this growth,” Mr Grocke told The Adviser.   

“As the purchase market slows, we’ll see these brokers become less busy and start to focus on refinances to maintain the same level of settlement volumes. This is what has always been unique about the broking industry, if one channel slows (new purchases) then you can refocus on refinancing.”

Mr Grocke added that the next factor is the movement of interest rates. The Sherlok CEO noted the record-low level of the official cash rate, adding that at “some point in time in the future we’ll start to enter a new phase of the interest rate cycle which is likely to be rate increases”. 

Indeed, the Reserve Bank of Australia (RBA) has repeatedly said that it would not increase the cash rate until actual inflation is sustainably within the target range of 2-3 per cent, adding that the central bank’s central scenario for the economy is that this condition would not be met before 2024.

“History shows that refinancing activity increases when there are rate movements (up or down). Interest rate movements provide the lenders with a great opportunity to pass on more than the RBA cash rate increase to gain back their back book margins that have recently been cut due to competition and stagnant rate movements,” he said.

“When the lenders start to do this (we call this the loyalty tax), you’ll see a larger disparity between the homeowners’s current rate and rates with other lenders who want to attract new clients.” 

Additionally, the introduction of new technology to automate refinancing – including Sherlok’s offering for mortgage brokers – would also drive this activity further.

“This means the hurdles (slow process, paperwork, 30 days to settle, cumbersome process etc.) to switch home loans will disappear and you can refinance the same day,” he said.

“This will allow Australian home owners and brokers the flexibility to truly vote with their feet and maximise their savings.”

Maintaining ties

While refinances may continue to climb, Mr Grocke added that repricing activity would also increase.

According to Mr Grocke, this combination is further evidence for the value of brokers in maintaining services with their clients, explaining that brokers should be “actively repricing their clients to keep them with the same lender”. 

“It’s a win for the clients, broker, aggregator and lender if the [client’s] on a lower rate and doesn’t need to refinance,” he told The Adviser.

“However, if the lender can’t reprice the rate to a competitive interest rate, then the brokers have a duty to discuss refinancing with their clients. Currently, client drop off can be as high as 15 per cent per annum and will increase as refinancing activity increases.”

Figures provided by Sherlok suggest that brokers lose $7,200 of revenue (in upfront and five-year trail fees), if a client decides to refinance away from them.

Furthermore, with confirmation earlier this month that the RBA will continue to hold a record-low interest rate, repricing rates are becoming increasingly competitive as lenders vie for market share.  

“This means that brokers who aren’t repricing their clients are at a very high risk of losing them,” Mr Grocke said. 

“After all, the number one reason a client refinances is to lower their rate and save money. So if they are always on a competitive rate, they shouldn’t need to consider refinancing unless for accessing equity or consolidating debts.”

Scale of opportunity

According to Mr Grocke, the value of repricing or refinancing a client onto a better rate is invaluable in providing a positive customer experience.

He suggested that some brokers using Sherlok were able to reprice up to 2 per cent of their book, and were achieving a 90 per cent success rate in repricing.

However, he added that lender appetite to reprice had improved in recent months (potentially due to high refinancing activity), with more lenders being “very competitive with the repricing and some even matching the most competitive rate in the market, which is an outstanding outcome for the clients, broker and lender”. 

“Lenders who have repriced at a competitive rate, are 99 per cent likely to keep the client as the broker doesn’t trigger a refinance. However, if the lender hasn’t repriced to a competitive rate, we’re seeing an increase in refinances. In some cases one in five ‘uncompetitive reprices’ are being refinanced by the broker,” the Sherlok CEO said.

“If the lender has simply declined the reprice because it was a basic loan, no frills or no fee loan, we’re seeing as many at six out of 10 being refinanced by the broker.”

[Related: 6 in 10 haven’t reviewed loan to refinance: Aussie]