A refinancing boom is eroding the major banks’ dominant share of the $2 trillion mortgage market, as their customers shop around for more competitive interest rates with minor lenders.
Figures from online property exchange PEXA show the number of mortgage refinancings is surging, with non-major banks increasingly becoming the lender of choice for homeowners.
Refinancing is a “zero-sum” game in banking: for every bank that wins a loan, another lender loses one. PEXA’s data, which covers 95 per cent of refinancing deals, shows the big-four banks and their subsidiaries are losing thousands of more loans than they are winning each month.
Refinancing has jumped sharply, and the trend is expected to continue as interest rates rise.Credit:Jason South
The gap of refinancing wins over losses appears to be widening in favour of the bank minnows.
PEXA’s head of research Mike Gill says the trend is particularly apparent in the key NSW and Victorian markets, and it has occurred while big banks removed some of their ultra-cheap fixed-interest rate mortgage deals.
“If you look back to the start of the pandemic, the major banks were quite successful in winning more refinancing. Obviously, those fixed rates motivated many borrowers to move across,” Gill says.
PEXA says the number of refinancing deals lodged through its platform has jumped almost 50 per cent in Queensland, 46 per cent in Western Australia, 23 per cent in Victoria, and 15.6 per cent in NSW.
Importantly, refinancing is only part of the picture, and the big four have been stronger when it comes to selling new mortgages to people who are buying a home. However, they have still been growing more slowly than other non-major banks across the entire mortgage market.
Macquarie analyst Victor German says in the three months to April, the mortgage market for all deposit-taking institutions expanded by about $31 billion, but the big four picked up only $11.5 billion of this loan growth.
If the bank giants had grown their new mortgage portfolios in line with their 75 per cent share of all existing home loans during this period, they would have expanded their loan books by about $23 billion.
German says the big four had an edge over their smaller rivals in recent years because they were able to offer rock-bottom fixed interest rates that their smaller rivals could not. However, that’s now changed.
“The interest rates that they were able to offer on fixed loans were unmatchable for many others. Now that’s no longer the case, they started to lose [market] share again,” German says.
As interest rates rise, German says there is likely to be continuing competitive pressure in the home loan market, as people rolling off cheap fixed-rate loans consider other options.
“As fixed loans start to mature, people will be going from 2 per cent interest rates to 3-per-cent-plus variable rates. I think we will see that a lot of consumers look at the market and see who is offering good rates.”
Banks also have their own specific problems: Westpac and ANZ, in particular, have well-documented difficulties in approving loan applications quickly.
In an attempt to win back market share, ANZ and Westpac took the unusual move of reducing some interest rates for new borrowers in May, shortly after increasing their mortgage interest rates.
There are also a flurry of cashback deals on offer. RateCity reports 27 lenders are offering cashbacks, which can be worth several thousand dollars for an average-sized home loan. Other banks are trying to lure customers with perks such as frequent flyer points or free internet for three years.
However, cashbacks alone are generally less important than getting a lower rate when you refinance, which can save you thousands of dollars over several years.
For bank shareholders, it has been a rough ride, with share prices tanking this month in response to fears of global recession and higher interest rates.
Over the longer term, the market is also likely to closely monitor the impact of stiff competition in mortgages on bank profit margins, which are a key influence on overall earnings.
Even so, Morningstar analyst Nathan Zaia believes the big-four banks are in a better position than their smaller rivals to deal with official interest rates rising more quickly than previously thought.
A key factor that will help the big four, Zaia says, is the “free kick” they receive from all the money households keep in low-interest transaction and savings accounts, rather than term deposits, which tend to cost banks more.
“It’s a balancing act,” Zaia says. “I still think that as we head into a higher interest rate environment, it’s going to be the smaller banks that hurt more.”
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