Home owners are rushing to refinance as economic uncertainty and a fiercely competitive market drive them to nab better deals.
But mortgage brokers have warned of several roadblocks, after providers tightened lending criteria to manage the risks of acquiring new customers while holding onto existing ones.
New figures released by the Australian Bureau of Statistics last week show the number of people refinancing their mortgage jumped 11 per cent from March to April.
Although the number of new home loans sunk 4.8 per cent year on year, the total value of those loans rose an astounding 50.9 per cent.
Canstar financial expert Steve Mickenbecker told The New Daily the “penny has dropped” for people who contemplated refinancing in rosier times.
With market-leading fixed and variable home loan rates approaching 2 per cent, a saving of hundreds of dollars would come as a timely boost to households wanting to save.
“People should be aware that by switching from the average variable loan of 3.47 per cent to the cheapest rate on the market (2.19 per cent from Reduce Home Loans), the saving on a 30-year $400,000 loan is $272 a month,” Mr Mickenbecker said.
“Not only that, but some providers are providing sign-on bonuses of up to $4000, which could cover two months of repayments.”
Canstar recently released a new Home Loan Rate Checker tool allowing home owners to compare deals across the market before refinancing.
Five key challenges home owners face in refinancing
Mortgage Choice broker James Algar said his northern Sydney firm experienced a 50 per cent jump in refinancing inquiries since the beginning of the pandemic.
The majority of those came from finance and IT professionals, tradespeople and JobKeeper recipients.
However, the ongoing market slump and conservative valuations could stop home owners from securing even cheaper home loans, he said.
“There’s a major question mark, especially for home owners who only purchased their home within the last two to five years, over the likelihood of their property valuing at the same level as their purchase price,” Mr Algar told The New Daily.
“Valuers’ opinions right now are understandably conservative, and the typical refinance valuation, which was always between 5 and 10 per cent below the selling price, is now at the lower end of that spectrum.”
An owner-occupier who took out an $800,000 loan when buying a $1 million property, for example, may be on a product with an 80 per cent loan-to-value ratio (LVR).
If valuers assess their property to be worth $950,000, they would no longer meet their agreed LVR (as that ratio has increased).
However, borrowers who are a decade into their mortgage should be in an improved position, with the national median property price rising nearly $140,000 over that time, according to property analytics firm SQM Research.
Hero Broker founder Clint Howen told The New Daily refinancing now comprises 90 per cent of his firm’s workload, compared to 70 per cent before COVID-19.
He said banks are asking more questions when vetting home loan customers, which means some applicants could miss out.
“Certain industries – say anything in travel or tourism – have been flagged as potentially impacted by COVID, regardless if you kept your job,” Mr Howen said.
“[Banks] will ask about income, expenses and may require documentation to be updated on a weekly basis and even days before the loan is settled to verify their income, because they are so worried about these workers losing their jobs.”
According to Mortgage Choice’s Mr Algar, the other key challenges home owners could face include:
- Lenders’ reduced appetite to consider non-base salaries (i.e. bonuses) when assessing a home owner’s borrowing power (down from roughly 75 to 80 per cent to 50 to 60 per cent)
- Huge break costs for owner-occupiers to leave expensive fixed home loans, with banks refusing to waive costs
- For investors, lower rental property valuations and reduced servicing capacity for landlords who negotiated rental reductions (or lost tenants).