Is the age of bumper home loan cashbacks over?

Home loan customers have been in the box seat to demand a sharp interest rate from their bank in the past year, as lenders fought tooth and nail to retain customers.

Lately, however, there have been signs this bout of red-hot competition may be coming off the boil. Or at least, that’s what banks would no doubt like to see.

Some major banks have recently cut mortgage cashbacks and raised interest rates for new customers.Credit: Karl Hilzinger

Banking giants have recently made it abundantly clear they’d be happy to compete a bit less ferociously on price for home loan customers, as mortgage profits feel the squeeze.

One sign of this is that mortgage discounts – which banks make to their headline interest rates – have been shrinking.

Canstar reports all big four banks have increased certain advertised variable mortgage rates at least twice since March. Westpac, NAB and Commonwealth Bank have also announced they’ll stop paying cashbacks of several thousand dollars, and RateCity says the total number of lenders paying cashbacks has declined slightly from its peak.

What do these trends mean for borrowers? Has home loan competition really started to dwindle?

It’s pretty clear the banks are trying to pull back on some of their most competitive offers to protect profit margins. They’re doing this because they feel the level of home loan competition was “irrational”, that is, loans were being written at rates that delivered returns lower than those demanded by shareholders.

Canstar group executive Steve Mickenbecker explains some of the most competitive mortgage deals were a product of a different time, when lenders could raise funds extremely cheaply because deposit interest rates were extremely low. Lately, banks have started competing more aggressively for deposits, and that’s put pressure on banks’ margins.

So, Mickenbecker says, it’s likely banks will try to relieve some of this pressure on their profitability by being a bit less competitive in trying to win new home loan customers. “Borrowers might not expect that the banks will be chasing as hard with price. Maybe these deals won’t be as generous,” he says.

Even so, it’s important to note that the recent moves by banks to dial down the competitive intensity only affect the advertised rates they’re offering on new mortgages, not existing loans.

This distinction matters because much of the recent competition in home loans has been driven by banks trying to hang onto their existing customers.

Credit Suisse analyst Jarrod Martin says even though competition may be waning for new customers, it is as fierce as ever for existing clients, and he doesn’t see that changing in the short-term.

Why? Because banks have an abnormally large number of customers who are on fixed-rate loans that will roll over onto much higher rates over the next year or so. Banks are desperate to retain as many of these customers as possible, and the way to do this is to offer competitive rates. That means banks should continue to be unusually focused on retention, which bodes well for existing customers seeking a competitive interest rate.

“If you want to stay with your current bank, there’s still going to be the same competitive dynamic,” Martin says.

Reserve Bank governor Philip Lowe.Credit: James Brickwood

Chief executive of mortgage broker Homeloanexperts, Alan Hemmings, also says there has been some easing in competition for new customers. But even though interest rate discounts have reduced overall, he maintains there are still plenty of competitive offers in the market, and with rates rising so quickly, he says customers are more aware of what they’re paying on their loans.

“Customers have become a lot more conscious of what their interest rate is on their home loan, and they are looking for alternatives,” he says.

That suggests it will continue to be worthwhile for customers to ring up their bank and ask for a better deal on their home loan if they haven’t done so recently.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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