Analysis provided to a Senate inquiry by the Australian Banking Association reveals that 70% of bank customers whose fixed mortgage rates expired in the past six months have refinanced with another bank.
The trend is leading to intense competition in the $2 trillion home loan market and poses risks for lenders as home loan books face unprecedented levels of turnover.
On average, the ABA’s data revealed that 2,370 people are refinancing their mortgage every working day, reflecting the high level of competition in the market. Furthermore, data provided by the ABA’s 20 member banks shows that of the 308,961 mortgages refinanced over the last six months, 214,916 or 70% of customers switched lenders, while only 94,045 refinanced with their existing lender. In 2019, ACCC figures showed those numbers as just 39%.
This trend has resulted in lenders being forced to offer existing customers similar incentives to what is being offered to new borrowers, including interest rate discounts of up to one percentage point and cash backs, to prevent customers from switching banks. This is forcing some banks to write mortgages at below the cost of capital and putting pressure on net interest margins, or the profitability of lending.
With just 30% of fixed-rate customers staying with their existing bank, lenders are facing increasing competition in the market. This trend highlights the need for banks to focus on customer retention and to provide attractive incentives to customers in order to maintain market share in the highly competitive home loan market.
According to online lending platform Lendi Group, NSW has the largest number of mortgage holders refinancing their home loans to get a better deal. Lendi Group reported that $422.53m worth of home loans in NSW have changed lenders since the start of 2023, representing 49% of refinancing activity across the country.
That compares to $163.28m in loans for Queensland and $158.29m for Victoria during the same period, each accounting for about a fifth of total activity nationally.
In an opinion piece in the March issue of MPA magazine, ABA CEO Anna Bligh (pictured above) said Australia’s banks were fiercely competitive, offering a wide range of products and options for customers.
“We recommend that Australians shop around to find the banking product that best suits their personal needs and circumstances,” Bligh wrote.
The recent failure of Silicon Valley Bank has prompted analysts to warn of exacerbated margin pressure due to higher wholesale funding costs in US markets. This is of particular concern for banks given that the Reserve Bank of Australia has lifted the cash rate 10 times to a decade high, from 0.1% to 3.6%, between April 2022 and March 2023.
Despite concerns over the $350 billion in fixed-rate loan credit that will roll off this year, and a similar number in 2024, banks are pushing back against the notion of a mortgage “cliff”. According to the ABA, the rollover of mortgages from fixed to variable rates will occur progressively over the next two years.
In a submission to the Senate Select Committee on Cost of Living last week, the ABA said: “Data from banks contained in this submission indicates that there is no ‘mortgage cliff’, and these products will rollover progressively during this period.”
The changing mortgage rate structure may put further pressure on margins for banks, but they are expected to remain competitive in order to retain market share.
At an MPA-hosted roundtable attended by leading customer-owned banks in February, refinancing and fixed rate roll-offs were hot topics.
Mark Middleton, the head of third party distribution at Teachers Mutual Bank Limited, said the fixed rate cliff should be called a slope or a hill “as it’s not immediate but rather over the next 12 to 18 months as fixed rates mature”.
Vincent Lewis, national manager partnerships at Bank Australia, which is a member of the ABA, said in 2022 the bank enjoyed 17% loan portfolio growth and it wasn’t searching for business, it was coming to the organisation. He credited Bank Australia’s successes to its one-on-one relationships with brokers and customers.
Kaine Adamson, general manager broker at P&N Bank and bcu, said banks couldn’t just be good at acquiring new customers, they had to be good at looking after existing customers too. P&N Bank did this by offering the same loan rates to both new and existing borrowers.
Source: www.mpamag.com
