Refinancing dynamics shift amid changing landscape

As investor refinancing acclimatises to higher rates, adjusting to increased costs and reduced incentives, the market is becoming more complex – but deals are still out there with the right advice

IS IT back to business as usual for investor refinancing? Maybe it depends on your perspective. If you take the beginning of the Reserve Bank of Australia’s interest rate hiking cycle in May 2022 as a benchmark, the latest figures show that the total value of investor refinancing is up 6% since then. But compared to 12 months ago, external refinancing for investor housing is down 19%. Perhaps the best way to describe it is that the interest rate hiking cycle sparked a refinancing party, and that party is now over. The market is digesting the hangover medicine and waiting to see if the doctor is satisfied.

But this doesn’t mean the market is inert; in fact, it’s exactly the type of market in which the value of brokers and professional help can shine through. “Good deals and attractive refinance options are available but may be a little harder to find than in previous years,” Drummond says. “For investors, whose financial position is often quite different from owner-occupiers’, the opportunity to get a deal is still out there.” Many investors have benefited from significant capital gains over the last few years. PropTrack’s April Home Index shows annual price growth of 6.6% nationally. A year ago, annual growth was in the minus column. “This presents opportunities around refinancing to tap into available equity for those who can service and benefit from it,” says Blake Buchanan, general manager at Specialist Finance Group.

A key prerequisite is being able to ride out the current economic environment, and it’s important to make sure customers have a read on what’s over the horizon. “Investors should have a conversation with their mortgage broker to understand their borrowing power and get their ducks in row on pre-approvals so they are ready to act on a potential property purchase,” says Herbert. “Brokers will be able to guide to align policy [with the rate change], as well as on products from a panel of lenders to maximise opportunities for their clients.” This includes double-checking access to property professionals such as buyers’ advocates and real estate agents, because when the drop eventually comes, investors will be fast out of the starting blocks.

Apr 23

Value of refinancing by borrower segment

The value of expert advice will become even more important as we head into the next, long-awaited phase in the interest rate cycle – the drop. “We do expect interest rates to come down later this year ... this should be positive for refinancing activity,” says Paul Herbert, AMP Bank’s head of lending and everyday banking distribution. “Talking to your broker may bring options to investors that they may not have considered to help them achieve their goals.” Some investors might feel like they have a handle on the lending markets, but it’s better to be safe than sorry. “Whilst the risks of refinance are generally low, and [loans are] completed for more competitive terms, there could be credit-score implications if borrowers go it alone and apply with lenders that won’t approve them,” says Buchanan.

“Refinancing also usually results in loan terms resetting, which potentially increases the interest charged over a longer period. This is why it’s vital that refinancers speak to a finance broker.”

Specialist Finance Group (SFG) is a family-owned business that has been serving the broking community for more than 30 years. With a customer-centric model, SFG provides its members with the best possible systems, services and support to assist them in growing and improving their businesses. SFG’s unique model has seen rapid expansion in recent years that has consistently delivered results well above system.

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Gateway Bank is one of Australia’s leading customer-owned banks and has been in operation for over 60 years. Gateway offers a wide range of products and services covering everyday banking, home loans, personal loans, reverse mortgages and commercial mortgages. Its Green Plus Home Loan was recognised by Mozo as Australia’s best Green Home Loan in 2022 and 2023 and by Finder as Australia’s Best Green Home Loan 2023, underpinning the bank’s commitment to its ‘Pocket & Planet’ purpose.

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The investor market has shown resilience over the last year amid more challenging conditions. Many brokers who may have largely sat on their hands over this period now have the opportunity to prepare for a more dynamic market when rates finally fall. But where can brokers find customers in such an environment while rates are still high? “The first place to explore is their existing customer base. There may be clients who are looking to invest in property but don’t know where to start, as well as others already in the market,” says Drummond. Referral sources, accountants, lawyers, and real estate and buyer’s agents are also likely to have clients who would benefit from a mortgage broker’s support and expertise. Reaching out to economists at various banks and using online resources will help. Expanding professional networks before rates start to drop means getting out and about now. “An effective way to do that is to take part in industry events,” says Lockwood. Both investors and brokers know that the current waiting period won’t last forever. There will be a number of investors considering a move and watching closely for market signals. “The downward rate outlook over the medium term, including a potential rate drop later this year, could be a catalyst of refinancing opportunities,” says Herbert.

BOQ Group is a truly unique group of challenger brands with a purpose – to provide a genuine banking alternative for customers. Our family of brands includes Bank of Queensland, ME, Virgin Money Australia, BOQ Specialist, BOQ Business and BOQ Finance, and each comes with its own defined customer audience and brand personality. Key to the success of our brands is the strength of our broker relationships. We’re committed to making business easier to do with us – by transforming the lending experience and investing in the right technology and teams to improve speed, ease and consistency for brokers and their clients.

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“Funding costs, both retail and wholesale, have meant a lot of the fierce competition for home loans of recent years has subsided … borrowers now have fewer attractive options available than 18 to 24 months ago”

Zeb Drummond, Gateway Bank

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Cashbacks are a case in point. “While refinance cashbacks were prevalent across the market a year ago, many lenders have now withdrawn these offers. An investor switching to a bank without a cashback may take more time to recover their refinancing costs, such as discharge and settlement fees,” says Lockwood. For banks, today’s more expensive interbank rate means they aren’t chasing business like it’s 2023. “Funding costs, both retail and wholesale, have meant a lot of the fierce competition for home loans of recent years has subsided. As a result, borrowers now have fewer attractive options available than 18 to 24 months ago,” says Zeb Drummond, chief operating officer at Gateway Bank.

The timing of the drop, of course, is a moving feast. Every time an item of data comes along that indicates that the economy is struggling, hopes for early rate cuts are boosted; meanwhile, evidence that the RBA is not damping inflation or economic activity sufficiently feeds the ‘higher for longer’ narrative. “Recent jobs and inflation data has taken many by surprise, which doesn’t seem to correlate with the consumer confidence or savings data,” says Buchanan. “This revelation has pundits now speculating that rates will at least hold now for a longer than anticipated period – or, worse, that the RBA might again move the dial up.” More economists are moving out their predictions for a rate cut to the fourth quarter or into 2025. “Earlier this year, the market was tipped to see a good chance of interest rates coming down this year,” says Lockwood. “However, uncertainties have arisen about when this will happen, due to ongoing concerns about the pace of inflation decreasing.” It’s a bit like a financial version of the play Waiting for Godot – the narrative for the remainder of the year has every possibility of taking on the frustrating elements of Samuel Beckett’s theatre of the absurd as investors mull their options and bide their time. But unlike in Beckett’s play, the long-awaited Godot will arrive eventually. “As we move into a downward cycle, investors need to be paying close attention to their existing loan and comparing to the market as there will no doubt be lenders looking to win share as the mortgage market begins to open up,” says Drummond.

“It’s very hard to see the stock on the market reaching good levels in the short to mid term, and so brokers should continue to manage their current book and tap into the direct market further”

Blake Buchanan, Specialist Finance Group

Despite the value of refinancing deals being roughly the same as two years ago, the landscape is quite different. Higher interest rates have materially impacted borrowing capacity for investors, who need to demonstrate servicing at rates that are typically higher than for owner-occupiers. “While they might [be able to] afford their current loan payments, demonstrating their ability to handle a new lender’s loan, once mandatory buffers are in place, can prove problematic for investors seeking to refinance,” says Johnny Lockwood, general manager of broker and strategic partnerships at BOQ Group. Twelve months ago, lenders everywhere were jockeying hard for a place at the refinancing table on the back of an upward rate cycle.

Industry experts

Paul Herbert

AMP Bank

Zeb Drummond

Gateway Bank

Blake Buchanan

Specialist Finance Group

Industry experts

Blake Buchanan, general manager at SFG, is an expert in the broker channel with some 20 years’ experience in the finance industry, specialising in broking, lending and aggregation. Buchanan is known for his expertise and passion for the broker channel, along with his ability to deliver strong distribution results through systems, people, processes and partnerships.

Specialist Finance Group

Blake Buchanan

Zeb Drummond has over 18 years of banking experience, having worked across a range of disciplines in a variety of organisations, from the big banks to customer-owned banks, and has been at Gateway for eight years. As chief operating officer, Drummond currently leads Gateway’s sales and operational teams, including the direct and third-party sales functions, the customer service teams, and the lending origination, settlement and transactional service teams. He also manages the relationship with Gateway’s broker aggregator partners.

Gateway Bank

Zeb Drummond

Paul Herbert is AMP Bank’s head of lending and everyday banking distribution, with over 28 years’ experience in financial services, specialising in home lending and distribution. Herbert is known for his resilience and expertise in transformation, strategy and distribution across lending markets. He leads AMP’s dedicated distribution and mortgage broking finance teams, supporting and guiding them to build strong relationships with brokers, advisers and aggregator partners. Additionally, he is committed to mentorship, to helping build business success, and to driving tailored solutions for brokers so they can unlock opportunities and achieve their clients’ wealth ambitions.

AMP Bank

Paul Herbert

Johnny Lockwood

BOQ Group

Paul Herbert

AMP Bank

Zeb Drummond

Gateway Bank

Blake Buchanan

Specialist Finance Group

Industry experts

Specialist Finance Group

Blake Buchanan

Gateway Bank

Zeb Drummond

AMP Bank

Paul Herbert

Johnny Lockwood is the general manager of broker and strategic partnerships at BOQ Group. He leads a high-performing national team, managing the broker channel across Bank of Queensland, ME Bank and Virgin Money. His responsibilities extend to overseeing the BOQ and Virgin Money credit card portfolios; platform transformation; and crafting an innovative loyalty platform and strategy for the group’s new digital bank. Lockwood is instrumental in the digital transformation strategy, aiming to introduce a market-leading home loan proposition and a next-generation whole-of-bank customer experience, with the broker channel being the first to launch.

BOQ Group

Johnny Lockwood

Digesting the medicine of higher rates

Blake Buchanan

Specialist Finance Group

Zeb Drummond

Gateway Bank

Paul Herbert

AMP Bank

Johnny Lockwood

BOQ Group

Johnny Lockwood

AMP Bank

Paul Herbert

Zeb Drummond has over 18 years of banking experience. He has worked across a range of disciplines in a variety of organisations, from the big banks to customer-owned banks, and has been at Gateway for eight years. As chief operating officer, Drummond currently leads Gateway’s sales and operational teams, including the direct and third party sales functions, the customer service teams, and the lending origination, settlement and transactional service teams. He also manages the relationship with Gateway’s broker aggregator partners.

Gateway Bank

Zeb Drummond

Specialist Finance Group

Blake Buchanan

Products and vehicles tailored for investors

Published 03 Jun 2024

“Demonstrating their ability to handle a new lender’s loan, once mandatory buffers are in place, can prove problematic for investors seeking to refinance”

Johnny Lockwood, BOQ Group

“Investors should have a conversation with their mortgage broker to understand their borrowing power and get their ducks in a row on pre-approvals so they are ready to act on a potential property purchase”

Paul Herbert, AMP Bank

AMP Bank is a non-major digital bank that has been operating for over 25 years, providing Australians with home loans and deposit and transaction accounts. We take pride in our strong service aimed at making it easy for brokers to do business with us, and ensuring customers have a positive banking experience. At AMP, we’re here to help people create their tomorrow, and we value brokers’ role in achieving this, supporting clients to make some of life’s largest financial decisions.

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Refinancing levels on the wane

May 23

Jun 23

Jul 23

Aug 23

Sep 23

Oct 23

Nov 23

Dec 23

Jan 24

Feb 24

Mar 24

$0bn

$5bn

$10bn

$15bn

$20bn

$25bn

Total refinancing

Owner-occupier refinancing

Investor refinancing

Source: ABS lending indicators, May 2024

Source: CoreLogic Hedonic Home Value Index report, May 2024

Sydney

Change in capital city housing values from onset of pandemic to Apr 2024

% change from onset of COVID to Apr 2024

% change from series peak to Apr 2024

Series peak date

Melbourne

Brisbane

Adelaide

Perth

Hobart

Darwin

Canberra

26.1%

11.0%

56.8%

58.7%

59.3%

28.7%

25.6%

31.4%

-0.8%

-4.1%

-11.2%

-5.8%

-6.0%

Jan 22

Mar 22

Apr 24

Mar 22

May 14

May 22

Current economic challenges for investors

Other risks for investors between now and then include housing stock levels, tax cuts, immigration trends, regulatory changes and overleveraging of equity. “All client scenarios and circumstances are different. It’s therefore essential investors carefully assess risk factors like financial stability, loan terms and conditions, and refinancing costs,” says Herbert. Low housing stock relative to demand has been able to keep pushing national average values higher over 2023 and 2024 despite the negative factors of high interest rates, weak consumer sentiment and ongoing cost of living pressures. While prices may stall over the winter, the weak supply trend is likely to continue limiting the downside.

“It’s very hard to see the stock on the market reaching good levels in the short to mid term, and so brokers should continue to manage their current book and tap into the direct market further,” says Buchanan. He also sees the government co-ownership scheme – available to residents in states that have passed legislation supporting the scheme – adding to demand. “The government co-ownership scheme will create more competition in the buying landscape, which will again keep prices lofty due to the undersupply and borrowers now having a vehicle to assist in a purchase.” The continued upward march of rent levels supports the business case for investors. Another area that may affect the housing market, not to mention consumer sentiment and the prospects for inflation, is the upcoming tax cuts.

Property market dynamics and risks

Buchanan says market sentiment will be buoyed as Australians will have more money to save or spend from July on, as a result of these cuts. But there is a possible dark side to this. “While these changes may provide benefits to investors, they also present potential downside risks,” says Lockwood. “For example, inflationary pressure could lead to further interest rate increases, which would have a negative servicing outcome for investors looking to refinance.” Inflation is already a big concern for investors due to the increasing cost of maintaining properties. “The cost of repairs is increasing, [as well as] labour and insurance premiums,” he explains. “This is occurring amidst the escalating costs of living outside of their investments, in particular [for] items such petrol and groceries.” Other possible risks on investors’ radar might include regulation changes around the political-football issues of short-term holiday rental income and negative gearing. There is no shortage of potential downside risks, but gauging their likelihood and effect is an area best left to professionals – old hands will understand this well. “When it comes to rental property investment, thorough consideration of the actual costs needs to be factored in,” says Drummond. “A culmination of vacancies or rental abandonment, land tax or rates and strata fees can place additional pressure on investors. First-time investors are most likely to be bitten by these.” New builds are also a risky area. “It’s a volatile construction environment that people should consider when refinancing for the purposes of new purchases, particularly off the plan,” says Buchanan.

Banks and financial institutions have a range of products suited to the investor market. AMP’s home loan has a master limit feature, which offers borrowers an overall lending limit that caters to their current and future financing needs. “With the flexibility to restructure debts between deductible and non-deductible categories over five or 10 years, investor clients can optimise their financial strategy with access also to up to 10 subaccounts, while adhering to a maximum of 80% LVR or their borrowing capacity,” says Herbert. “If a client owns an investment property with a non-spouse, they can apply a Common Debt Reducer policy and apportion the assessed repayment and income based on the client’s percentage ownership.”

This allows them to include property costs within the Household Expenditure Measure and offers an LVR of up to 90%, inclusive of lenders mortgage insurance. Banks are constantly tweaking their products in this area, and keeping up with the changes is something brokers are adept at. BOQ Group’s Bank of Queensland recently extended the maximum LVR for investment loans to 95%, inclusive of LMI. “This change can help investors optimise their use of equity so they can expand their property portfolio,” says Lockwood. One recent hot area (no pun intended) has been loans designed to help reduce the environmental impact of housing. Gateway Bank has added an investor product to its suite of ‘green’ home loans, helping save borrowers on mortgage costs for the life of the loan. “This loan is for homes that meet a certain energy-efficiency rating and offers a discount of at least 0.25% per annum for the life of the loan,” says Drummond. “Ensuring a home is energy-efficient and therefore resilient to heat and cold also adds value to the property and can increase rental returns.” Another growth area, for non-banks at least, is self-managed super funds, which can be used to invest in both residential and commercial property. “There is often refinancing attached to these transactions, where customers should engage their brokers for appropriate structuring,” says Buchanan. SMSFs have a reputation for complexity, but SFG provides access to empowering educational content for brokers, who can use the knowledge gained to identify opportunities and assist their clients.

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