Why the honeymoon is over as banks raise interest rates for new borrowers
Mortgage broker George Samios is running the ruler over many of the home loans on his books.
“Our biggest concern this year is all our customers coming out of those 1.99 per cent fixed rates, rolling on to a variable rate in the 6s,” the Brisbane broker says.
Mr Samios estimates his brokerage has over $100 million in customer loans expiring this year, and a further $200 million rolling off next year.
Borrowers are facing hundreds, and in many cases thousands, of dollars extra a month in repayments, so many are searching for a better deal.
At the start of the year, banks were fiercely vying for their share of the refinancing boom, offering cashback offers and competitive interest rates to attract borrowers away from their existing lenders.
“At the peak, we saw 35 lenders offering cashback deals to new customers willing to refinance over to them,” RateCity research director Sally Tindall tells The Business.
“Today, that number is just 12.”
Ms Tindall says the competition started to cool when CBA hiked one of its new customer rates in March, a move which has been followed by almost 90 per cent in RateCity’s database since.
“When CBA says ‘jump’, often the banks say ‘how high?’
“However, we have seen some exceptions — ANZ would be one of the notable ones, they’ve kept their cashback incentive on the table for refinancers when the other three big banks have pulled them away.”
Competition starts to show up in bank margins
CBA reported a record profit for the past financial year, of $10.2 billion.
That was largely down to an increase in the bank’s net interest margins, or the gap between the interest it pays and charges, which rose by 0.17 of a percentage point over the year.
“Net interest margins are going up because interest rates are going up, but they haven’t handed the depositors as much of the increase from interest rate rises as mortgage holders,” market strategist Evan Lucas notes.
But CBA highlighted that margins are now heading in the other direction, decreasing by 0.05 of a percentage point between the first and second half of the year.
As the banks start to pay the price for competition, rates for new customers have begun heading higher.
“Next financial year we expect competition, customer deposit switching and higher wholesale funding costs to remain margin headwinds, partly offset by the benefit of higher average cash rates,” the bank’s results statement reads.
Honeymoon over for new borrowers
Typically, banks offer attractive rates and discounted deals to new borrowers to win their business, with existing borrowers who don’t ask for a better deal losing out.
In fact, the Finance Brokers Association of Australia (FBAA) has been calling for more transparency around the rates charged to existing borrowers, or so-called “back-book” rates.
“The industry call it rate creep — so once you’re on the books, basically you’re beholden to whatever the lender wants to do,” FBAA managing director Peter White says.
Data from RateCity shows that has reversed in recent months.
Since March, the RBA has raised the cash rate three times, by a total of 0.75 percentage points.
The big four banks passed that increase through to existing borrowers.
But, they have increased the advertised rates for new customers by even more.
“If you take CBA, for example, a new customer today taking out one of their lowest rates could potentially be paying 0.42 percentage points more than a customer that took that exact same loan out in March of this year,” Ms Tindall observes.
Fixed rates roll off into mortgage prison
It’s not a normal time in the mortgage market generally, as hundreds of thousands of home owners roll off fixed rates onto much higher variable deals.
“This will continue for a little while to come, there’s probably another six months of it until the end of the year to see the final impacts of it and how people actually deal with it,” Mr White says.
If those borrowers try and refinance with a different lender, they’ll be assessed on their ability to repay at an interest rate 3 per cent higher than the rate they are being offered, under requirements by the banking regulator, the Australian Prudential Regulation Authority (APRA).
That means existing home owners may be unable to borrow the amount needed to refinance, leaving them as “mortgage prisoners” with little option to move to a better deal.
The FBAA believes this is leaving people trapped unnecessarily.
“You need to relax [the APRA buffer] for somebody who’s already got a loan… you’re already in the system,” Mr White argues.
Some banks have made exceptions for borrowers who meet particular income or loan-to-value ratio thresholds, but newer borrowers without much equity in their loan will likely struggle to have a lower buffer rate applied.
“If you’re one of the customers that is a mortgage prisoner and you can’t technically afford to refinance… call up your bank, get through to [the retention team] and demand a better rate,” Mr Samios advises.
“If we can’t get them out of their current bank because of a borrowing capacity problem, we renegotiate their rates on their behalf.”
Discount deals could be back on the table soon
For those who do qualify to refinance, RateCity’s Ms Tindall recommends shopping around.
“The big four banks may have turned their back on the refinancing boom but that does not mean that competition in the market is dead in the water and it’s not worth refinancing — it absolutely is,” she says.
“But you may have to look beyond the big four banks if you want one of the sharpest rates.”
Mr Samios expects the major banks to soon be competing for new customers again, as they begin their new financial years.
CBA has a financial year ending 30 June, which is why it just reported its results, while Westpac, NAB and ANZ end their financial year on 30 September.
“They want to show high profits to their shareholders,” Mr Samios says.
But he is starting to see some good deals emerge, even if advertised rates remain high.
It’s good news for borrowers like Charlie Olsen, who is in the middle of refinancing as his three-year fixed rate expires.
“It did alleviate some of those concerns that I was having, having such a significant rise in those interest rates,” Mr Olsen says.
For those able to, refinancing at a better rate will cushion some of the fall off the mortgage cliff.
