Why customers aren't refinancing despite record low interest rates

Newly commissioned research from Aussie has revealed that while 60% of Australian mortgage holders aren’t confident they have a good home loan deal, only one in five have refinanced their mortgage in the last 12 months – a trend Lendi Group CEO David Hyman believes holds plenty of opportunity for brokers to tap into.

Speaking with MPA, Hyman said out of 6 million mortgages, only 450,000 were refinanced last financial year despite record low interest rates being well publicised across the broader community.

“I think there's an inertia, so to speak, with borrowers,” he said. “People know that there’s money to be saved, they just haven’t taken the step to go and save it.”

He said many mortgage holders could be hesitant to refinance because of bad memories they have from a pre-tech age, not knowing that the adoption of Docusign and other digital practices has changed the process involved with many lenders and brokers.

Read more: Resetting refinancing expectations

“People may have memories of refinancing being a long and laborious process from their last experience many years ago,” he said. “As a borrower, if you’ve got a reasonably straight profile and you’re looking to do a dollar-for-dollar refinance just to get yourself a better rate, in some cases all you really need is a payslip.”

The research cited that 24% of those surveyed were worried they could be worse off if they refinanced – a factor that Hyman attributed to a knowledge gap in terms of the changeover costs usually incurred. He said given the amount most people save when refinancing, coupled with the loan sizes being refinanced, most borrowers are able to pay off this cost within the first couple of months.

According to mortgage broker mentor and business coach from Masters Brokers Group Mario Borg, another reason people worry they may be worse off is because the loan term is reset back to day one when refinanced.

Hyman said that was something brokers could educate their clients about as part of the transaction.

“I think good practice is to engage in a proper needs-based discussion with customers and in most situations, if the customer is looking to refinance, they’re looking to shave time off their loan, not add time to it,” he said. “What we typically recommend, and this is a generalisation, is if you’ve got a customer whose going through that process, it’s often better to keep the loan term where it is and ultimately be making extra repayments. By keeping the repayments where they are at from a customer perspective, this means the loan gets paid off quicker.”

Borg said complacency played a big part in borrowers choosing not to refinance.

“From experience I have found that the trigger for mortgage holders to even contemplate a review is when there is an interest rate movement,” he said. “Stable interest rates create complacency. I have also found that most people are just super busy with work and with life, so unless their home loan is broken, they don’t fix it.”

The study also found that 22% of mortgage holders believed it was too hard to refinance – a trend that Hyman attributed in large part to assessment delays at many lenders.

Read more: Borrowers finding it hard to refinance following loan deferral

“There are lenders that have one day turnaround times and others that have 20-day turnround times and from a customer’s perspective, that 20-day turnaround is probably the one that sticks in their mind,” he said. “It really comes down to brokers educating customers on the other pathways if they want a faster approach.”

Education is also the biggest opportunity brokers can leverage off the back of these findings. Hyman said that since less than 10% of loans were refinanced last financial year, there was a wealth of untapped opportunity that could be realised through regular check ins.

“Every customer’s circumstances are going to be different but the key things to think about are customers coming up for fixed term expiries, people’s interest only periods expiring or whether it is just time for a 12 or 24 month check in.”

He suggested brokers use those milestones to have a discussion about refinancing and how their customers might be able to get a better rate.

Borg said there were plenty of opportunities for brokers to offer home loan reviews for their customers “to ensure that their cost of funds is the lowest possible.”

“Many lenders are also offering cash rebates, therefore this can be promoted as a win for the mortgage holder as a way of covering change over costs,” he said. “Brokers should also ensure they introduce an aftercare program for their existing customers, with a periodic home loan review, to ensure that their clients remain “sticky” and that they don’t get swallowed up by clever marketing. Major FIs have big budgets as a way of luring in existing home loan customers from their competition.”