As the economy continues its post-Great Recession progress, interest rates are expected to continue rising in 2018 on almost all financial products, including personal loans and mortgages. With these rate increases, the industry forecasts a reduction in mortgage rate refinancing. A study by Black Knight reported that in just the first six weeks of 2018, about 1.4 million borrowers lost the interest rate incentive to refinance their mortgages.
However, the data doesn’t stop there. According to TransUnion’s Consumer Credit Forecast, refis will drop from a 35 percent share of loans in 2017 to 28 percent in 2018—a relative drop of 20 percent. Moreover, the Mortgage Bankers Association projects that total mortgage loan volume will decline this year and remain flat in 2019.
Fewer loans means even fewer refis, making it critical for financial institutions to present more competitive offerings. In fact, consumers are actually encouraged to refinance existing debt regardless of the rate environment if it means they can pay loans off faster. Most people, if life allowed for it, would pay off debt quickly by paying more on their loans.
But the challenge is life itself.
Surprise expenses happen, so consumers—knowing they must prepare—opt not to pay down their loans. Why put emergency savings toward something if they can’t get it back?
To solve this pain point, banks should implement a people-first solution that doesn’t trap consumers’ extra payments. If banks were to allow consumers to “take back” their extra payments, imagine the outcome: longevity, loyalty and referrals, all the hallmarks of a real relationship.
The idea is to allow borrowers to pay off a loan faster but leverage take-backs to access extra payments in times of need. It eliminates that fear of parting with “extra money” while also enabling the consumer to make better financial decisions such as paying down debt faster.
If extra payments return to the control of the borrower, it stands to reason that borrowers would want a way to visualize this control. Smart financial institutions will offer a mobile application that permits borrowers to manage their debt by showing them the status of their loan in just seconds. The app should allow consumers to see the impact of payment changes before they make them, and thus provide them even more oversight. Ultimately, this will also enable them to make better financial decisions for their present and future.
Despite rising interest rates, this borrower-first focus of offering loans with a take-back feature can help your bank attract business. In fact, 98 percent of consumers say they would refinance existing debt at the same rate in order to get a loan with take-back functionality. By placing higher importance on what consumers really want in a loan, banks can attract borrowers to refinance in spite of increasing rates and declining loan volumes.
No longer can financial institutions compete on just two historical advantages: rate and speed. And though rising rates will inevitably encourage price wars, banks no longer have to offer drain-swirling rates when they put consumers’ wants and needs first in lending. While a stellar front-end experience and quick lending decisions are important to the borrower, rushing them through the process of taking on more debt isn’t the best approach.
Simply put, outpricing megabanks and alternative lenders no longer has to be the approach to gaining market share. Instead of considering how expeditious the journey or precariously low the rate, financial institutions must compete on something that is completely different—and is actually good for the consumer.
As the refi market dries up, the opportunity exists for financial institutions to offer customers something unique to talk over—lending with a borrower-centric mindset—and in the process obtain a competitive edge that moves loans back to community institutions. For those reasons, and many more, it’s time to hit the refi reset button.
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