Borrowers refinance as rates start to bite

HOME loan activity jumped unexpectedly in January, as borrowers juggled their finances to cope with rising interest rates.

House on paperwork /Roland Maier

Borrowers refinance as rates start to bite

HOME loan activity jumped unexpectedly in January, as borrowers juggled their finances to cope with rising interest rates.

Figures out today from the Australian Bureau of Statistics show the number of home loans issued to owner-occupier borrowers rose 2.3 per cent in January, well above market expectations of a 0.5 per cent rise.

Much of the rise was due to people refinancing their loans.

“Overall, the result is something of a surprise given the backdrop of rising interest rates (both official and unofficial) and tightening credit market conditions, “ Westpac economists said in a commentary.

“However, much of the gain in January (and in previous months) reflects strong refinancing activity - ie “churn" - rather than new lending," the economists said.

Approvals for home loan refinancing rose 6 per cent in January, following on from a 4.8 per cent increase in December. But excluding refinancing, the number of owner-occupier home loans rose a more modest 0.7 per cent in January compared to a 1.5 per cent fall in December.

Westpac economists said borrowers who had refinanced were probably trying to insure against further interest rate hikes, or else were moving from non-bank lenders to bank lenders. Bank lending rose 3.3 per cent for the month, compared to a 2.2 per cent fall in non-bank lending.

Fixed rate loans remained fairly solid in January, with 22.3 per cent of borrowers opting to lock in their interest rates - down slightly from 23.4 per cent in December.

Rates to squeeze lending
The data predates the last two interest rate rise from the Reserve Bank, which hiked the official cash rate in February and March taking it to 7.25 per cent, but coincides with the period big banks raised lending rates independently of an RBA move.

Some economists see the risk of a further rate increase in May after the next official reading of inflation in late April while others see the latest increase as possibly the last given signs higher rates are already biting in some sections of the economy.

Despite facing political pressure for raising rates in January, when the RBA did not meet and the official cash rate was unchanged, a number of big banks have this week raised lending rates over and above the RBA’s latest official 25 basis points hike.

Loans slip for new constructions
Total housing finance by value rose 3.7 per cent in January, seasonally adjusted, to $23.166 billion. Investment housing, by value, climbed by 8.3 per cent to $7.237 billion.

But new dwelling purchase commitments fell by 4.9 per cent in January to post their seventh successive monthly slide.

The number of first time home buyers hitting the market in January slipped to 18 per cent of total loans taken out, from 18.4 per cent in December. The average loan for first home buyers grew to $232,200 in January, up from $231,100 in December and $226,900 the previous January.