Banks’ home loan battle heats up as refinancing booms

At the same time, a wave of ultra-cheap fixed-rate loans taken out during the pandemic is set to phase out by the end of next year. When these borrowers move to significantly higher interest rates, they have every incentive to look for a better deal.

The latest ABS numbers show external funding hit a record high of $18.1 billion in June, RateCity notes, and bankers expect the funding boom to continue.

In anticipation of the refinancing surge, banks are planning how best to retain existing customers while attempting to poach customers from competitors by offering discounted interest rates, quick approvals, or thousands of dollars in cashback.

Dennis Teale, general manager of retail banking at Bendigo and Adelaide Bank, says his research found that about 20 percent of fixed-rate customers would refinance with another institution.

“The part of the industry that everyone is keeping an eye on is the large group of customers who have benefited from low fixed rates at the end of the cycle. That’s the opportunity and the risk for anyone playing in the market,” he says.

To manage risk, the bank has a program to call and text customers with expiring fixed-rate loans and offer them interest rebates at maturity.

Angus Gilfillan, chief executive of digital mortgage broker Finspo, says greater awareness of savings when shopping also leads to higher refinancing. “I think Australians are better educated than ever,” he says.

Gilfillan also predicts that banks will aggressively target refinancers and try to identify which of their customers are at risk of leaving, but he’s critical of any moves that might make it harder to exit a bank. “Despite all the efforts that lenders have made to make switching to them easier and faster, it’s disappointing when steps are put in place to make switching from them more difficult,” he says.

Aside from increased price competition, banks are also using technology to reduce customer churn.

Technology company Elula is providing banks with a service that uses data to predict three months in advance which customers will churn and generates a “conversation” that the bank can have with those customers.

Its co-founder, Josh Shipman, says that only about 30 to 40 percent of those conversations are about price, and the rest cover other topics like debt consolidation, complaints, or financial products. “Sixty percent of the conversation doesn’t have to be about profit margins,” he says.

Westpac chief executive Peter King also said the bank is eyeing a possible wave of refinancing, and that’s one of the reasons it’s frontloaded plans for one digital mortgage that could be approved in as little as 10 minutes. The bank also says it is writing to customers who are leaving its fixed rates to offer them “competitive” rates.

The wave of refinancing — and the potential for big rebates — comes after regulators were keen to encourage more transparency into home loan pricing given the huge sums households are spending on mortgage payments.

In what critics have dubbed a “loyalty tax,” banks routinely charge new borrowers lower interest rates than long-standing customers: a home loan from the Australian Competition and Consumer Commission Request 2020 underscored the potential to save thousands through shopping.

The ACCC recommended banks give customers with loans that were taken out more than three years ago a “prompt” to see if switching could save them money; a standardized mortgage relief form; and a maximum timeframe for banks to process relief requests. The former coalition government did not officially respond to the request. The banks had reservations about some of these recommendations, but argued that data sharing would increase mortgage competition.

Bankers have long said there is nothing wrong with attracting new customers with lower interest rates than their existing customers are paying, saying it is an inevitable product of capitalist competition.

However, investors are watching closely how the competition for customers is developing. Their concern is that aggressive discounting by banks could dampen an expected recovery in profit margins tend to expand when interest rates rise.

Bank chiefs have made it clear that they expect mortgage competition to remain fierce as lenders throw large sums of money at consumers to encourage them to switch.

ANZ chief Shayne Elliott said on radio station 3AW in July that cashback deals of $3,000 to $4,000 were common in the market, while CBA chief Matt Comyn, looking at the bank’s annual results, noted that one bank offered $6,000 in cashback -dollars offered. While Comyn did not name the lender, NAB-owned Citi has a $6,000 cashback deal.

Comyn said there has been “a significant escalation in both pricing and cashback incentives,” but he also argued that it’s a risky time to seek growth at any cost. The latest cohort of borrowers, who have borrowed at rock-bottom rates, are also seen as the most vulnerable to rate hikes, and in this environment Comyn argued the bank would be happy to sacrifice some growth.

“We’re prepared to remain disciplined on pricing and risk, and if that means growing below the market at times, then so be it,” Comyn said.

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