Mortgage competition to ease as rates rise, says Bank of Queensland boss Patrick Allaway

Bank of Queensland boss Patrick Allaway says competition for home loans will subside as mortgage stress forces banks to price risk more appropriately amid rate hikes.

Bank of Queensland expects “irrational” competition for mortgages to subside, with banks having to “price risk” more prudently as the central bank raises interest rates for the eleventh time since last May.

With mortgage stress rising and prisoner customers – those unable to meet serviceability criteria for loans at new banks – having no option but to stay put even if they have to pay more, banks won’t be willing to compete as much for home loans.

After declaring last month that the bank would sit out an irrational market where mortgages were being offered at interest rates below banks’ cost of capital, BOQ chief executive Patrick Allaway on Tuesday told the Macquarie Australia conference things would “rationalise”.

“With the industry headwinds that you’ve got at the moment, going into a tough macro environment, my sense is you will see pricing for risk become more prudent,” Mr Allaway said.

He was speaking in Sydney just hours before the Reserve Bank of Australia on Tuesday surprised investors and economists with a 0.25 basis points increase in the cash rate – the target rate for overnight loans between banks – to 3.85 per cent, the fastest tightening cycle in a generation.

Australian banks are generally very quick in passing on the increase to home loan customers, which has an immediate impact on millions of Australian households, many of which could not afford many more interest rate increases.

Bank of Queensland boss Patrick Allaway expects competition for home loans will subside. Picture: Dan Peled

Banks are competing fiercely for home loans that in the next 12 months will need to be refinanced at rates that have more than doubled in cost, from about 2 per cent to about 5.5 per cent.

But many customers seeking to refinance their loans would not pass the so-called “serviceability” test that banks must apply before selling a new loan.

About one in every five borrowers fail to meet the test – which adds a 3 percentage point imaginary “buffer” to the actual mortgage rate.

The only option for these prisoner customers that don’t meet the criteria would be their current bank.

Macquarie banking analysts said there were early signs of competition lessening for new mortgages, or what banks call their front book.

After analysing their proprietary Lendi Mortgage Pricing Index, Macquarie’s head of research Victor German said they had seen pricing “moderate”.

“So we have actually seen competition potentially start to rationalise on the front book,” he said.

Three of the nation’s big four banks – National Australia Bank, ANZ and Westpac – are set to report combined bumper first half profits of $11.7bn in coming days. But analysts and investors will instead focus on how fast net interest margins – what banks earn on loans less what they pay for funds – will decline as higher interest rates begin to drive mortgage stress.

With the outlook for margins deteriorating in coming months, BOQ expects investors will put pressure on banks to temper their desire to compete.

“The NIM pressure that we have seen will come through in the second half, I think that will cause many to pause and say, do we actually want to continue to destroy shareholder value by writing business that doesn’t give us an appropriate return and that is below our cost of capital?” Mr Allaway said.

He said mortgage stress would appear with a lag, as more loans were refinanced at higher rates, adding to the risk that banks should consider before offering irrationally competitive mortgage rates.

“There are many consumers that are experiencing hardship, both from the cost of living, energy price rises and mortgages,” Mr Allaway said.

“Most of the impact of rising interest rates is always deferred, always comes later, and you expect it to. But clearly, if we have high interest rates for longer … you’ve gotta expect there’s going to be more hardship.”