Banks battle for new customers and refinancing activity as interest rate hikes continue

As Australia braces for further rate hikes, banks are having to fight harder to lure new customers and those seeking to refinance.

MA Financial’s John Kolenda says the home loan market is at a tipping point ahead of the RBA’s meeting on Tuesday. Picture: Supplied.

Banks and lenders are battling for mortgage customers on two fronts, by wooing new customers and looking to pick up some of the anticipated $500bn in refinancing activity, as rate hikes continue.

Economists are expecting the Reserve Bank to jack up interest rates by as much as 50 basis points again this week, reflecting the sixth rapid increase since May. Another 50 basis point hike to tame inflation would take the cash rate to 2.85 per cent, or the highest level since April 2013.

The rising interest rate environment caused a sharp 11 per cent drop in the value of new home loan commitments in July, compared to a year earlier, and house prices are falling as demand wanes.

Banks are having to fight harder to lure new customers and those seeking to refinance, or even retain existing customers that may be shopping around due to markedly rising rates.

“Lenders are actually aggressively pricing for refinance as well as new business,” said John Kolenda, MA Financial’s managing director of strategy and growth.

MA – formerly Moelis Australia – acquired mortgage broking group Finsure Finance in a deal that completed early this year, giving the company strong insights into the home loan market.

Mr Kolenda – who co-founded Finsure – said banks were competing hard to win mortgage customers, while refinancing was accounting for a bumper 55 per cent of volumes.

“Traditionally if the purchase market is really strong then they’re out there for new borrowers and they ignore the refinance market, and when the market tightens they go for the refinance market

“This cycle is a dual-pronged attack,” he added.

RateCity data shows the biggest cashback offers in the market come from Reduce Home Loans, AMP and Citibank, whose local retail operations are now owned by National Australia Bank.

Reduce provides $5000 cash back for home loans of $750,000 to $2m, Citi offers $5,000 for mortgages of more than $850,000 while AMP provides $5,000 for loans of more than $1m.

The fierce activity in the mortgage market comes as banks and lenders also digest two sweeping reports that may prompt changes in the industry. One of those is a review of the Consumer Data Right – which underpins the open banking regime – giving users more control over their data and making switching banks or financial services providers easier.

That report recommended that the practice of screen scraping to collect user data be banned in sectors where the data right is “a viable alternative”. Screen scraping extracts data digitally from a banking user and is often controversial if customers are giving the provider their log in and password details.

A separate review by the Regional Banking Taskforce last week made seven key recommendations including assessing and strengthening the sector’s branch closure protocols, and implementing closure impact assessments.

In the near term, however, this week’s RBA action is the main focus.

Tic: Toc chief Anthony Baum said the digital lender and fintech platform was seeing heightened mortgage competition, and positioning for a wave of refinancing activity as more borrowers neared the end of their terms on cheaper fixed-rate mortgages.

“My expectation is that it (refinancing volume) will be significantly stronger from the fourth quarter this year onwards, because the fixed-rate home loans that were a significant part of most lenders’ volumes through the pandemic start to mature or reach the end of their fixed period,” he added.

Mr Baum noted as house prices retreated it could spur first home buyers to pounce on opportunities.

“They’re checking affordability, they are getting full approval subject to property and they are positioning themselves for the fall in prices,” he said.

“For first home buyers a fall in prices of 10 per cent can actually offset the increase in interest costs to some degree, because the borrowing amount drops.”

Mr Kolenda expects borrowers will start to curtail spending as further rate rises make loan repayments even higher.

“The two rate rises – the most recent ones – still haven’t filtered through to hitting the hip pocket. It’s generally six to eight weeks, so borrowers haven’t seen the impact of those two payment rises,” he said.

“It’s going to hit home that message and they’re going to slow down their spending … we are at that tipping point.”

Mr Baum said as funding costs rose lenders that primarily tapped securitisation markets to package up mortgages and sell them as bonds would be doing it tough.

“If you’re a consumer and you’re with a non-bank lender that doesn’t use bank funding there is a high chance that you can get a cheaper home loan elsewhere,” he added.

Banks draw on deposit funding which typically means a lower cost to fund mortgages.

Within the competitive dynamics, Commonwealth Bank and ANZ on Friday announced revisions to fixed rate home loans.

ANZ increased its one-year fixed rate for owner-occupiers and investors by 50 basis points, while CBA hiked its one and four-year fixed rates by 40 basis points and 50 basis points respectively.

CBA did, though, cut its three-year fixed rates for owner-occupiers who are just paying interest by 1.05 percentage points.

RateCity’s research director, Sally Tindall said: “It’s an odd message to send at a time when it’s critically important for owner-occupiers to keep paying down off their loan, if they can afford to do so.”