Homeowners face refi challenges as home values fall

As many as 15% of surveyed homeowners have faced challenges when trying to refinance, due to falling property prices.

Research conducted by mortgage lender State Custodians, quizzed 1,022 home owners on their ability to refinance in the current climate, as national average home values continues to fall.

According to CoreLogic market data for the month of July, capital city home prices declined by 0.6% and now stand 2.4% lower over the year; it is the largest monthly decline in six and a half years. The national home price index also declined by 0.6% to average a 1.6% decline over the year.

The figures published by State Custodians also revealed that young people were the most affected, with around 34% of those under the age of 34 saying they’ve been unsuccessful in re-financing because of declining property values.

“Property prices have been stagnating and falling across much of Australia for some time now – especially in the major capital markets of Sydney and Melbourne – which has made refinancing tougher for some,” State Custodian general manager Joanna Pretty said in a statement.

“Anyone who has not yet built up a substantial amount of equity in property or whose property has fallen in value is more likely to be unsuccessful in seeking refinancing,” she added.

However, there is some good news as 29% of respondents said they are confident their property’s value has improved since purchase. Further, 41% of people with mortgages have successfully refinanced their home and experienced no problem getting a better rate as their property’s value increased.

Pretty said that when refinancing, homeowners and investors are often overly confident that their property increased in value.

“Declines in property value are influenced by what is happening in the market and the land value of the area,” she said. She explained that valuation of homes even in good areas can still come back below expectation due to poor property maintenance and upkeep.

Pretty suggested that “it may also be helpful to be present when a valuer visits to point out improvements that may not be immediately apparent, such as solar panels.”

Elsewhere, AB says brokers can help the thousands of people labelled ‘mortgage prisoners’ by directing them to non-bank lenders, is the call from an industry association.

Mortgage prisoners are borrowers unable to refinance to a lower interest rate due to changed lending criteria by the banks.

The Finance Brokers Association of Australia (FBAA) has said that going to non-banks is the way to overcome this.

FBAA executive director Peter White said the government should also step in and push banks to be realistic with their modelling.

He revealed he personally brought up the issue with federal treasurer Scott Morrison when the two caught up at a recent lunch.

White said banks have recently increased the interest rate ‘buffer’ they add onto a loan to ensure the borrower has capacity to pay if rates rise, but the extent of the increase has led to a situation where borrowers who are already paying a mortgage are being rejected for loans that actually reduce their repayments.

He said, “It’s madness. Someone wants to refinance to pay a lower rate yet the bank adds an extra 4% to the interest rate and decides the borrower can’t afford to pay less.”

He said while he understands the need for a lender to add a safety net to the prevailing interest rate, they are now effectively doubling the rate to a level where the borrower can’t meet the new lending criteria.

He added, “This doesn’t affect the wealthy, it affects those who can least afford it and it has almost stalled the home loan refinance market.”

The assessment change is a knee-jerk reaction by the banks to recent inquiries and the royal commission, according to White, who predicts the banks may start to set an even higher rate.

He said the situation only reinforces the value of the expert advice that finance brokers provide and has urged brokers to be proactive in the space.

He said, “Many Australians are not even aware of non-bank lenders, let alone the difference or that they are not under some of the same regulatory oversight, so we must educate and help them. We know the banks won’t!”

Reasons to Get a Mortgage Refinance

There are some amazing mortgage refinance deals out in the market at the moment as lenders seek out lower risk mortgage borrowers, so it is worth considering whether a refinance is appropriate for your financial situation.

There are both benefits and risks, as this guest post from NSW Mortgage Corp highlights.

First let’s be clear what a refinance is. Essentially it means transferring your current mortgage to another lender, (or a different loan with the same lender), and it may be for the same amount, or if there is sufficient equity, you might be able to get a bigger loan. But there might be fees to do this, and not all lenders have the same deals, so it is important to shop around.

There are a range of scenarios where a refinance makes sense.

Reducing Monthly Payments and Avoiding Default

Many households are finding their monthly mortgage repayments a strain, yet they are not necessarily on the lowest available rate. Depending on your current rate it might be possible to reduce the real monthly payments. In some cases, this make the difference between keeping the mortgage up to date and missing payments, which might lead to default.

Helping with Home Renovations

With home prices on the slide in some areas, more home owners are looking towards home renovations as a way to increase the equity in their home. But, home renovation is costly. Renewing or restoring your home to its former conditions may require expensive materials and skilled labor. You need money to finance house renovations like fixing of old walls and ceilings, repainting and plumbing works. Things could get more costly if you would include roof repair or replacement, fixing of sewer line problems, and fixing pest problems.

But if there is sufficient equity in your property (value of the property less current mortgage) it is feasible to refinance and drawn down money for renovation. Often this is a more cost effective route than looking to fund renovations on a credit card, or even a personal loan, because secured interest rates tend to be significantly lower.

Invest in Education

Some households use equity from their property to pay for or to complete a college education, but this is getting more costly with time. For those thinking of going back to school while working, taking a break to complete the course funded from equity might work for you (provided the mortgage repayments can still be met from the household budget). Applying for refinance mortgage could spell the difference between a good and stable career and failure. Sometimes, you just have to make the decision and move forward with your career goals. In the same way, parents who are willing to send their children to a good school can take advantage of mortgage refinance. They can use the money to pay off the old mortgage and get some extra cash for their child’s education. This way, you don’t have to get another short-term loan or charge your credit card with a high interest date for your child’s tuition fees.

Pay outstanding bills

This is more tricky, but in some cases a refinance can be used to pay outstanding bills and so avoiding missing payments, save money on late fees and avoid getting a bad credit score. Think of this as a one-time opportunity to revamp your finances, as it’s not something which can be repeated often, the equity in the property is not an ATM.

Also, some loans have pre-payment penalties, while others don’t. So before you make any advanced payment, clear this up with your creditor. You can also pay overdue bills and save yourself from collectors and court suits.

The Small Print

But, you have to face one big truth – not all refinance mortgages are the same. There are lenders who have lenient standards and those that are very strict especially in terms of your income requirement. Others have strict credit score requirements and financial documents. So, before you sign up for the next refinance mortgage, ask everything you need to know about the requirement and the loan agreement.

While there are many benefits to mortgage and home refinance loans, there are risks to keep in mind as well.

Before choosing a refinance product:

Shop around and ensure you choose a refinance product best suited to your needs. Criteria includes what your loan to value ratio (LVR) is, and which home loan features you need or which features you no longer want
Make sure that the new mortgage is cheaper than your original mortgage
Be aware there may be high exit fees for leaving your fixed rate home loan early, and upfront fees from your new lender. Ask about additional costs such as private mortgage insurance, application of valuation fees, and the possibility of getting a third mortgage
Know the modes of payment. Some lenders offer interest only payment, which may sound so good because of low monthly dues, but it can actually draw more money from you because you are simply paying the interest and not the principal. Make sure that the payment terms allow you to pay the principal, plus the interest each month
Consider the housing market. Don’t get refinancing when the market is not doing well. You may end up paying very high fees in exchange of a loan. Why don’t you wait till it gets better? Or, you can opt for a more practical solution. Look for a lender that gives you an interest rate and loan costs which is similar to loan terms when the market is favorable. Remember that volatility has a high impact in the pricing of the real estate properties and the mortgage fees as well
Check whether making multiple refinance applications are damaging your credit file. Only make soft enquiries which do not affect your credit score

There are many reasons to get a mortgage refinance, but it ultimately depends on your situation. Always shop around and take your time to do research before making a decision. While shopping around, avoid making hard inquiries as this will lower your credit score which will result in getting higher interest rates. By considering all the advice given in this article, you will be able to determine which refinance product is best for you.

How Much Can Mortgage Holders Really Save By Refinancing?

We showed recently that households with specific post codes may have significantly higher mortgage rates than their neighbours. As a result, significant savings may be made by seeking out a mortgage with a better rate.

Of course households need to be careful, as they may incur transaction costs, and even break costs if the loan is fixed.

But we went though our Core Market Model looking at those who refinanced in the past year. We then calculated the annual savings they had, on average achieved. Here are the results:

The larger the loan, the bigger the potential saving, which is why there are state variations. There were quite big differences between the old rate and new rates, and we incorporated break costs where appropriate.

This again highlights that households should be checking their rates and seeking out better, lower rates. Substantial savings are available, and when we consider the average loan life is more than 5 years, the potential savings are significant.

Mortgage refinancing to be done digitally

From MPA.

From Aug. 1, all mortgage refinancing transactions in Victoria, New South Wales, and Western Australia will have to be carried out digitally using the Property Exchange Australia (PEXA) platform.

States across Australia have released detailed plans to phase out paper and welcome electronic property transactions into their businesses.

“This not only marks an important stage in the development of PEXA, but a major step forward in the banking, finance and conveyancing industries in realising the goal and benefits of the digital transformation of Australia’s largest asset class,” PEXA said.

These accelerated steps have seen online transfer transactions increase by 25% since the last audit in December. Refinance transactions reached an all-time high of over 200,000 completed online, which is a superb indication of the industry’s embrace of electronic conveyancing.

Listed here are some of the transformational dates outlined by the three states:

Victoria (Land Use Victoria)

From Aug. 1, refinance transactions are to be lodged electronically if the transacting parties to discharge mortgages are authorised deposit-taking institutions (ADIs). This applies to both retail and commercial mortgages and is covered under the Banking Act 1959.

These changes are contained in the Land Use Victoria Customer Information Bulletin 162.

NSW (Land & Property Information)

If both mortgagees in a refinance transaction are ADIs, then any combination of mortgages and discharge of mortgages signed on or after Aug. 1 must be lodged electronically, except where the mortgages and discharges of mortgages are to be lodged with any other dealing, affecting the same folios of the register.

These changes are contained in the LPI Conveyancing rules (Section 12E Real Property Act 1900).

Western Australia (Landgate)

From Aug. 1, all eligible commercial mortgages, standalone mortgages, discharges of mortgages, and refinances must be lodged electronically.

These changes are contained in the Landgate Bulletin No. 289.

Home Lending Roared Away In December

The ABS data on home finance for December 2016 confirms what we already knew, lending momentum was strong. But now we see that the number of OO first time buyers were down, whilst investment lending was strongly up.

Overall lending flows were up 0.8% in trend terms to $33.2 billion, with owner occupied loans up 0.23% ($20 billion) and investment loans up 1.68% ($13.2 billion). As a result, investment loans were 39.79% of all loans written in the month! Much of this went to the NSW market, where demand is hot, and prices are up.

Within the owner occupied data, refinancing of existing loans fell, down 1.23% to $6.38 billion, whilst other OO lending grew 0.93% to $13.6 billion. The largest percentage swing was borrowing for new dwellings, up 1.49%.

Given rates are now on the rise, we expect refinance volumes to continue to slide.

Looking at the original first time buyer data, there was 7% fall in the number of first time buyer OO loans written, down to 7,690; whilst investment loans by first time purchasers (not captured by the ABS as a separate category) is estimated to be up 1.4% to 4,236 based on the DFA household survey data. Many purchasers are going straight to the investment sector. The average loan was $319,000 for FTB and $384,000 for other borrowers.

Finally, the original stock data shows overall loan growth on ADI’s books rose 0.67 (which if repeated for a year would equate to 8%!), way above inflation, so no wonder household debt is still building. The investment loan book grew 0.63% or $3.4 billion, whilst the OO book grew 0.7% or $7.0 billion. The total ADI book was worth 1.56 trillion and investment loans made up 34.91% of the book in December.

Major brokerage sees surge in refinancing deals

From The Advisor.

One of Australia’s leading mortgage brokerages has seen an 11 per cent rise in refinancing deals through the broker channel, which it attributes to the August interest rate cut and increasing reliance on the broker channel.

Aussie Home Loans has revealed that there was an 11 per cent rise in refinancing deals in the September 2016 quarter through the broker channel, bringing in $1.8 billion.Further, the share of refinancing surged from 35 per cent to 40 per cent of Aussie’s total loan volume over the three months, compared with the corresponding period in 2015.

According to the brokerage, the rise is largely due to the August rate cut, but also to an increasing awareness of what brokers can offer.

The chief executive of Aussie James Symond commented, “The surge in refinancing reflects both the effects of the Reserve Bank’s cut in rates during August and the message getting through to borrowers that they can secure a better deal through a mortgage broker.

“With rates at the current historic lows and competition amongst lenders at an all-time high, borrowers are now keenly aware they could save thousands of dollars and years off the life of their loans through refinancing.”

Mr Symond concluded, “Lenders are fighting for market share with some offering attractive incentives to get customers to switch their home loans to them through a mortgage broker”.

Refinance approvals now over 30 per cent

Indeed, the recently released JP Morgan Australian Mortgage Industry Report, has found that refinancing has been steadily rising, with the share of loan approvals increasing from 10 per cent in 1992 to over 30 per cent today.

Speaking to The Adviser, Digital Finance Analytics (DFA) principal Martin North said that its surveys have shown that around 34 per cent of refinanced stock is from the broker channel, while refinancing loan flow via the broker channel is currently sitting around 51 per cent for the year 2016 to date.

According to Mr North, the rise in refinancing in general is due to a number of factors: “The main driver is to reduce monthly payments (many households are finding it hard to cope with incomes stalling, when costs of living are rising, so anything to reduce repayments are welcomed), [and] many households believe rates are as low as they will go, so want to lock in to insure against future rises.

“In addition, you will see some are looking to withdraw capital (either for themselves, or to help their kids get into the market) … Finally, the advertising campaigns the lenders have run have educated households about refinancing, and they are more aware of the rate of interest than they were.”

The JP Morgan report, which also touched on data from DFA, said that the growing popularity of refinancing is particularly interesting due to the “emergence of re-financing as a driver of housing credit growth”.

It reads: “Importantly, ‘growth’ in refinancing is highly correlated with growth in house prices — an increase in the proportion of refinancing approvals from ~10 per cent to ~20 per cent between 2000 and 2004 was accompanied by a ~80 per cent increase in Sydney house prices.

“More recently, an increase in the proportion of re-financing approvals from ~20 per cent to ~30 per cent between 2011 and today was accompanied by a ~50 per cent increase in Sydney house prices.”

The report highlighted that when refinancing “~90 per cent of major banks customers are retained within the major banks market share”. It found that one third remain with the same lender, while half refinance away to another major bank.

Further, DFA data showed that nearly two-thirds of regional bank borrowers are refinancing towards major banks, with non-banks holding poor attraction (with only 1 per cent of major bank and regional bank borrowers refinancing to a non-bank).

The JP Morgan report adds: “This indicates that by cutting price to drive market share (like CBA did earlier this year), major banks are simply poaching share off each other, which will most likely lead to a price-matching strategy by other major banks to retain share.

“This is important. If all major banks price rationally, then pricing stability should ensue across the incumbents – basically, major banks are their own worst enemy when they pull the price level.”

Mortgage Refinance Momentum Remains Strong

Continuing our examination of the latest household survey results, today we look at the refinance segment. This sector of the market is poorly understood, not least because refinance of investment loans are not separately reported in the official statistics. However, yesterday we got some insights from the new RBA Governor’s handout pack.

It shows that currently more than 30% of all home loan approvals are for refinancing (and this data includes estimates of investor refinancing). This is an all time high.

Graph 12: Refinancing Approvals

Actually, the average term for a home loan is dropping, to below 4 years, and a quarter of the book is churning each year. Here is the reason.

Graph 11: Variable Housing Interest Rates

New loans are being deeply discounted, (compared with rates being paid by loan holders). The RBA says:

The spread between the benchmark SVRs and the lowest available advertised rates has increased in recent years. The difference reflects both advertised and unadvertised discounts. It is not unusual for the discounts to be up to 1½ percentage points. Changes in discounts only affect new borrowers (and not the existing stock of mortgages).

This discounting is supported by lower funding costs.

Graph 13: Cash Rate and Funding Costs

As a result, bank net interest margins are largely unchanged.

Graph 1: Net Interest Margin

The gap is being closed by lower deposit interest rates (other than for long-dated term deposits which the RBA says accounts for about 2% of bank funding only).

So against this backcloth, the 1.3 million households in the refinance segment are seeking to refinance, driven by the desire to reduce monthly payments (38%), better rates (18%) or to lock in an attractive fixed rate (17%). Poor service only accounts for a small proportion of the transactions.

If we analyse the drivers by loan size, we see that brokers are tending to be more proactive when the loan is larger, and here refinance is more about releasing cash than just a lower rate. Indeed, much of this cash release is going back into the investment property sector, as we discussed yesterday.

Overall, households with loans in the $250-500k band are most likely to refinance.

Larger loans are more likely to be refinanced to an interest only loan.

So refinancing activity is supporting market momentum. Though total dwelling transfers are down, as shown by the ABS data, released this week, remember that a refinanced transaction would not necessarily be counted.

This chart, using ABS data, shows the total transfers of all dwellings (houses and other) and we see a fall in total transfers from Sept 2015, a peak of more than 120,000 to below 100,000 per quarter. Mapping the main centres, and smoothing the data a little, we see that Brisbane fell 10%, Melbourne 9% and Sydney 6%. So beware using this data to argue that housing momentum is easing, it is not that simple. The latest data may also be revised later by the ABS.

So, refinancing is an important element in understanding the current dynamic, and there are more households in the market now for a refinanced deal than a year ago. This explains the adverts “has your home loan got a 3 in front of it?” as shown below….

Trading Down Households Drive The Property Market

This is the final post in our series which updates the latest Digital Finance Analytics Household Surveys. This is data which will feed into the next edition of our flagship publication “The Property Imperative“. The March edition of which is still available on request.

Having looked at first time buyers and investors, today we look at households already owning a property. One important group are down-traders. This segment, of more than 1.2 million households have an existing owner occupied property. Many will have paid down their mortgage, and will have enjoyed significant capital gains in recent years. Now they want to sell, and buy something smaller, and sometimes also an investment property.

There are two key drivers. First, one third are driver by a desire for more convenient living (perhaps a smaller or no garden, or a move into an apartment, or somewhere with better public transport and services). Next we find one third transacting in connection with planning for retirement. Around 20 per cent are looking to switch their investments into property, whilst others are dealing with the death of a spouse or other factors. In total this group is a very significant influence on the market, with an appetite for quality apartments.

Next we look at up-traders. This is a significant, smaller, but important group, seeking to purchase a larger, and probably more expensive property. One third are driven by a desire for more space, but more – close to 45 per cent – are influenced by the prospect of capital appreciation, so a purchase is more an investment-related decision. Others are influenced by a life-style change, or a change in employment.

Then finally, we look at those seeking to refinance an existing loan. This is a large and significant group, which are being teased by ultra low rates and special offers. The most important reason to refinance is to reduce monthly payments, no surprise given flat income growth, and large loans. However, around 15 per cent are motivated by the opportunity to realise capital gains created by recent price growth. This flow of funds may go towards a holiday, building works, or other purchases, or to pay off other debts.

When we analyse the drive to refinance by loan size, we see that those with larger loans are more driven by cash release, whilst those with smaller loans are more concerned about reducing payments. We also note that brokers are more directly involved in the refinance of larger loans.

Typically, the refinanced loan will sit in the $250-500k range

Finally, we found that larger loans, even now, were more likely to be refinanced to interest only, rather than a principal and interest loan.

This concludes the latest updates. We will continue to run the surveys, and we expect to publish the next edition of The Property Imperative, with the latest results, in September or October this year.

Refinance, The Way to Go

We just released the latest edition of “The Property Imperative”, which is available free on request. This provides access to our latest household survey results. One key segment is the refinance sector and we feature our survey analysis on this segment today. This segment has become the new battleground for mortgage sector growth. Indeed there are deals below 4% currently to be had, including for 3 years or more fixed. Remarkably low rates.

There are around 695,000 households considering a refinance of an existing loan of which 78% relate to an owner occupied property, and 22% to an investment property. To assist in the refinance, 76% of households will consider using a mortgage broker.

Households are looking to refinance for a number of reasons, including reducing monthly repayment (39%), to lock in a fixed rate (15%), because of a loan rollover (13%), in reaction to poor lender service (10%), for a better rate (10%) or to facilitate a capital withdrawal (11%). In the next 12 months, 34% of these households are likely to transact (a rise from 29% last time), whilst 47% expect house prices to rise in the next 12 months.

The growth in refinancing can be expected to continue as the focus turns from investment lending to owner occupied new and refinance loans. There are a number of discounted offers for refinancing currently available. We note that a higher proportion are refinancing to a fixed rate.

The most likely loan size to refinance is $250-500k. The refinance drivers vary across the loan size bands. The largest loans are more associated with releasing cash, whereas smaller loans are more associated with reducing monthly payments, or resetting an existing term loan. We also note brokers are more associated with the refinance of larger loans.

The larger the loan, the more likely it is that the refinance will be to a fixed rate loan and to an interest only loan.