Discounted interest rates and cashback incentives are being increasingly used by lenders to retain refinancing clients, sometimes at the detriment of the consumer, brokers have revealed.
With more and more borrowers looking hard at mortgage repayments and considering refinancing ahead of the Reserve Bank of Australia’s first rate increase for more than a decade, brokers are warning that several banks have begun exhibiting channel conflict behaviours that are sometimes not in the best interests of mortgagors.
While the tension between direct-to-consumer and broker-introduced channels has been a longstanding issue, the spectre of channel conflict has been raising its head in recent months as lenders become increasingly concerned about retaining clients and net interest margin.
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Several brokers have reached out to The Adviser to outline their concerns that clients who are trying to refinance away from their existing lender are increasingly having their head turned at the last minute by retention teams who are contacting the client at the discharge stage to offer them a range of incentives not made available at the earlier repricing stage.
Speaking to The Adviser about the issue, brokers have said that these discretionary incentives include heavily discounted mortgage rates (not made available to the broker at the time of repricing) as well as, in some cases, sizeable cashback offers.
Banks that have been particularly called out for this behaviour include CBA, ING, ME Bank and Westpac.
The size of the problem
Anthony O'Flynn, senior mortgage adviser at IFA Mortgages, explained that his team reviews client loans every 12 months, which includes pricing them with their existing lender.
He revealed that he had a recent example where a client was priced with their existing lender but their final offer was not in line with the current market.
“I suggested we should therefore refinance to a new lender. Once the new lender had approved the loan, I submitted the discharge authority to the existing lender,” he explained.
“A day or two later, the existing lender had contacted the client directly to offer them a much more competitive interest rate than I was able to access via their pricing tool, and on top of this the lender also offered the client $2,000 cash to stay.”
Mr O'Flynn revealed that he recently had a client being offered a variable interest rate that was 0.43 per cent sharper than the best interests rate he could obtain via the bank’s pricing tool or through the business development manager.
“This felt like a form of channel conflict to me, and undermined the hard work we had done as a broker to ensure the client continues to obtain a competitive deal for their loans,” he said.
“All of this work for no new upfront payment, which could have been avoided if the existing lender was upfront about their best retention offer at the beginning.”
The time and cost of the problem
Aaron Christie-David from Sydney-based brokerage Atelier Wealth agreed that the issue was becoming “far more prevalent more recently”.
“If we’re losing deals, we track the reason why so we can learn from it. On average, we’re seeing that there’s a difference of up to 40 basis points [in interest rate] between what the lender tells us they can give our client, and what their retention team ends up offering them directly,” Mr Christie-David told The Adviser.
“We are going through the appropriate channels; going through the pricing tool and escalating (where we can) to ask the lender for the best offer they can give us before we look to refinance a client. But still, these offers aren’t being made available to us.”
He added that while the end customer benefits by eventually being able to access a lower rate, the downside is that the broker “looks like we didn’t try hard enough to help the client stay with that lender”, despite having spent considerable time and effort finding a suitable alternative.
“We do the discharge at formal approval, and to get to formal approval that’s generally about 14 hours worth; initial start, preparing the application, following the lender and getting to formal approval. Multiply that by the hourly rate of my time and the team’s time, you could be looking at a sunk cost of $1,500-$1,800 or so,” he said.
Some brokers have also revealed that their clients may have heard of friends or family receiving cashback from retention teams and are then expecting the broker to provide them with this cashback, even when this isn’t an offer available to the broker channel.
Given that this might be only a discretionary offer from retention teams, in some cases, brokers are feeling obliged to dip into their commission to ensure that they keep clients on their books and prevent clawback.
Peita Davies, finance specialist and principal at MoneyQuest Penrith & Blue Mountains, said: “The argument from banks about why they claw back commission from brokers [for refinances] is that it’s the cost to originate a loan. But if the banks are able to offer this continual cashback incentive to borrowers, and with discounted rates, they’d be much better off getting rid of clawback.”
How it’s impacting borrowers
A key concern flagged by brokers is that the retention offers may result in clients staying in loans that may not necessarily be in their best interests.
Ms Davies elaborated: “As brokers, we might identify that a product no longer suits [the client’s] goals and objectives, and we therefore recommend that they go to another lender and with another product.
“But, then the customer is listening to a retention team member – who is purely incentivised on retention numbers – offering deals that might not be right for the customer and that doesn’t suit their goals and objectives.
“These offers are only based on price. It shouldn’t be. If the customer is after a certain product and if the bank they’re with can support that particular product, then that’s one thing. But if they can’t, and they’re just offering cash for them to stay, that’s another. It doesn’t need to be this competitive.”
The MoneyQuest broker outlined a recent scenario where a borrower was refinancing their loan because they needed a $20,000 increase. However, after being swayed by the retention team from the existing lender with a cheaper rate, they ended up staying in a particular fixed product that didn’t suit her end goals and objectives.
Similarly, Mr Christie-David said that borrowers might lose sight of their reason for refinancing when the temptation of a better rate and cash is placed in front of them.
He explained: “There’s always a reason to refinance, it’s not just the lowest rate. The goal for refinancing is rarely dollar for dollar, instead we might do it with an intention – for example, if the client wants to pull cash out for an investment property or for renovations.”
Given that the refinance process takes hours of time to complete – and requires time and effort from a borrower’s part to collate and submit documentation, have valuations completed and applications approved – some brokers have now begun flagging this issue with clients and submitting discharge authorities to a client’s bank before going through the refinance application and approval process.
By doing this, they are able to see whether the borrower is offered a sharper rate from the retention team and saves the client time and effort.
For example, Amy Small, finance broker at Small Local Brokers, said that she was finding that retention teams were agreeing to give borrowers rates at a level that they had originally declined to match at the beginning of the broker’s research process.
As such, she said: “We are lodging the discharge form much earlier now in our normal process due to the retention we now expect. This way the client is made aware of the retention offer before we spend much more time working on a full application.”
Brokers call for level playing field
Given the issue, brokers are urging lenders to be transparent and upfront with their best offer when first requested.
Ms Small said: “I would like lenders to be a little more transparent with their offers. As a broker, I want my clients to get the best deal no matter where it is. I want the current lender to [meet] their needs.
“I’ll be here when they aren’t. I believe we could all work together.”
Similarly, Mr O'Flynn from IFA Mortgages suggested: “The simple way [to solve this] is that when we reprice their loan with the lender, using their own repricing tool, they give us their best rate.”
Mr Christie-David said: “Let’s put a process around this. Let’s agree that whether an existing client wants to leave, you give us the best offer and if the lender says that this is the best offer we can do, and another lender can do something better, or has something more suitable, perhaps there could be an opt-out at that stage for the client, so they can’t be contacted by retentions.
“If the lender has been given the opportunity to retain the client before any extra work has been put in, it puts the lender on notice that they’ve got to work hard at that stage. But it also ensures that the client and the brokers aren’t put through a huge amount of work that leads to no outcome. I think that’s, that’s a level playing field that we can all work with.”
[Related: Brokerage head calls out ‘unacceptable’ turnaround delays]
