The next battleground in mortgages
Despite record low interest rates, the volume of new lending continues to trend downwards, however, industry data is suggested that one segment in mortgages continues to grow.
In its latest assessment of the mortgage market, RFi Group senior analyst Nitish Bhatt said that the recent rate cuts did not signal an uptick in the demand for new loans.
“The recent decrease in loan volume recorded to ABS despite low rates, is likely to be driven by the uncertainty in the market pertaining to property prices and employment” ,” Bhatt said.
However, according to RFi Group data, refinancing intention has increased.
“There has been a clear correlation between rate cuts and the willingness of borrowers to refinance their mortgage over the next 12 months,” Bhatt said.
RFi Group’s assessment comes at a time when the latest research from the Australian Bureau of Statistics revealed that refinancing was up 27.5 per cent from April – the largest month-on-month increase since July 2002.
Overall, refinancing was up 91.6 per cent from the previous year.
Consistent with trend tracked by RFi Group data, ABS found that the value of new loan commitments for housing fell by 11.6 per cent in May 2020.
At the same time, the number of owner-occupier first homebuyer loan commitments fell 9.3 per cent from the month prior.
The value of new loan commitments to investors fell 15.6 per cent, reaching its lowest level since November 2002.
The new ABS lending commitment statistics are bad news for economic recovery, but borrowers are reshuffling the deck chairs, switching into well priced loans in this highly competitive lending market,” Canstar finance expert, Steve Mickenbecker said.
Indeed refinancing will be the new battleground for lenders.
The RFi Group data has revealed that competitive rates and sign-up incentives are becoming more important to driving choice for refinancers.
“While competitive interest rates was a big driver of lender choice for refinancers, incentives such as frequent flyer points, a fee waiver and cash bonus were also important in attracting these borrowers,” Bhatt said.
In fact, recent data from the mortgage aggregator group, AFG revealed that the big banks were gaining market share off the back of these offers.
Interestingly, RFi Group data suggests that the way that savings are communicated to customers can have a difference, with a dollar saving potentially more tangible to customers than a lower rate.
“Lenders need to highlight how much borrowers could save in dollar terms if they want them to make the switch,” Bhatt said.
RFi Group’s quarterly survey of borrowers revealed that 69 per cent of borrowers would switch purely on the basis of accessing a lower rate. However, the proportion of borrowers who would switch to access a lower monthly repayment is higher at 80 per cent.
“A lender that has been successfully employing this strategy is Athena,” Bhatt said.
RFi Group data also revealed the importance of lenders remaining engaged with their existing customers by providing them with incentives in recognition of their loyalty.
For example, in the first 12 months, customers most valued discounted interest rates for holding multiple products with their financial institution. After three years, the most valued offer was a discounted rate on their mortgage.
Bhatt recognises that it is a challenge for the banks who are under pressure to manage their margins and balancing the needs of the ‘front book’ – new customers with attractive rates – with their long-term customers in the ‘back book’.
It’s also an area under focus by the ACCC who are yet to deliver their finding.
“Not offering discounted interest rates for the life of the loan is a consistent pain point across the market.
“Our research shows that the majority of borrowers feel that their lender offers more competitive products to new customer customers.”
And of course price remains a key driver of switching. With competition again heating up we are likely to see an increase in refinance activity in the market.