Banks brace for refinancing ‘avalanche’ as cheap fixed-rate loans expire

For customers, the surge in competition sparked by all this refinancing is somewhat of a silver lining to the rapid increase in mortgage repayments.

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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 to 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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