Banks brace for refinancing ‘avalanche’ as cheap fixed-rate loans expire
The record-breaking boom in mortgage refinancing is expected to gain even more momentum in the months ahead as a $141 billion wave of fixed-rate home loans expires, forcing banks to compete aggressively for customers.
An index from online property exchange PEXA last week showed the number of loans being refinanced was 22.8 per cent higher than the same week last year and second only to a record level from December, and experts say refinancing activity will hit new highs in the coming months.
More mortgage customers are expected to refinance as a wave of fixed-rate loans expires in the months ahead.Credit: Rhett Wyman
PEXA chief economist Julie Toth said refinancing was likely to climb even higher over the next six months because of the sheer number of expiring fixed-rate loans, which were written when interest rates hit record lows during late 2020 and 2021.
“It will go higher from here,” Toth said. “We’ve got a very large number that are due to expire this year and next year, so those loans’ holders don’t have a choice: they have to refinance.”
After separate ABS figures last week also showed the value of mortgages refinanced hit a record high of $19.9 billion in February, Canstar group executive Steve Mickenbecker said more records in this area would “absolutely” be broken.
“As all of those fixed-rate loans start to come off, that’s going to be an avalanche of refinancing,” Mickenbecker said.
Australia is approaching a peak in the so-called “fixed rate cliff” – a bulge of borrowers on fixed-rate loans with ultra-low rates that will expire this year.
“As all of those fixed-rate loans start to come off, that’s going to be an avalanche of refinancing.″
The RBA has previously estimated about 880,000 loans on fixed rates will expire this year, and the peak in this wave is expected around the second half of this year. Morgan Stanley analysts have said the big four banks have $141 billion in fixed-rate loans due to mature in the six months to September.
For customers, the surge in competition sparked by all this refinancing is somewhat of a silver lining to the rapid increase in mortgage repayments.
Keen to maintain growth in their loan portfolios at a time of lacklustre new lending, banks are keenly focused on pinching their rivals’ customers who are coming off fixed-rate loans, as well as trying to keep their own clients.
The Reserve Bank’s Financial Stability Review last Thursday said there was “strong competition” between lenders for customers, with banks offering discounted interest rates and cashbacks to win business.
Toth also highlighted the number of customers negotiating with their bank for a better rate. “There’s a common perception that Australian bank customers are lazy, but actually they are increasingly taking advantage of the competition that we are seeing,” she said.
Some borrowers, dubbed “mortgage prisoners,” are unable to refinance because they do not meet the serviceability standards a new bank would need them to pass in order to take them on as customers. The RBA estimated 16 per cent of customers were in this position.
Even so, the RBA said “most” borrowers who could not refinance were still able to negotiate an interest rate discount with their bank, provided they met other criteria, such as those relating loan-to-valuation ratios.
Among bank investors, meanwhile, the refinancing boom is seen as a potential dampener on the high profits that have flowed to the sector as interest rates have taken off.
A flurry of analyst research has underlined the squeeze that stiff competition for loans is putting on net interest margins, which compare banks’ funding costs with what they charge for loans.
In a recent note to clients, Barrenjoey analyst Jonathan Mott said refinancing already accounted for almost 50 per cent of all new mortgage approvals, and that figure was likely to climb higher this year. Mott said in this environment, the contest between banks was “all about price,” which was bad for margins, but banks who did not join the fight could see their customers defect to a rival.
“If banks are not competitive with price, they risk seeing their mortgage book run off sharply, potentially setting the business back years,” Mott said.
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