At the same time, a wave of ultra-cheap fixed-rate loans taken out during the pandemic are expected to mature by the end of next year. When these borrowers move to significantly higher rates, they will be well advised to seek out a better deal.
The latest ABS figures show external refinancing hit a record high of $18.1 billion in June, RateCity notes, and bankers expect the refinancing boom to continue.
In anticipation of the wave of refinancing, banks are considering how best to retain existing customers, while trying to lure rivals’ customers by offering lower interest rates, quick approvals or thousands of dollars in cashback.
Bendigo and Adelaide Bank’s retail banking chief executive, Dennis Teale, says his research found that around 20% of customers with fixed-rate loans would refinance with another institution.
“The part of the industry that everyone is looking at is the large cohort of customers who took advantage of low fixed rates at the bottom of the cycle. It’s the opportunity and the risk for everyone playing the market,” he says.
To manage risk, the bank has a program to call and write to customers with fixed rate loans that are coming to an end, and offer them interest rate discounts at the end of their fixed term.
Angus Gilfillan, managing director of digital mortgage broker Finspo, says greater awareness of savings from shopping also leads to higher refinancing. “I think Australians are more educated than they’ve ever been,” he says.
Gilfillan also predicts that banks will aggressively target refinancers and try to determine which customers are at risk of leaving, but he criticizes any measure that could make it harder to leave a bank. “Despite all the efforts that lenders have made to make it easier and faster to switch to them, it is disappointing to introduce steps that make it more difficult for them to switch,” he says.
In addition to competing more on price, banks are also using technology to try to reduce customer “turnover”.
Tech company Elula provides banks with a service that uses data to predict which customers will unsubscribe three months in advance, and generates a “conversation” for the bank to have with those customers.
Its co-founder Josh Shipman says only 30-40% of those conversations are about price, and the rest cover other topics, such as debt consolidation, complaints or financial products. “Sixty percent of conversations don’t need to be on the sidelines,” he says.
Westpac chief executive Peter King also said the bank was considering a possible wave of refinancing, and that was one of the reasons it presented plans for a digital mortgage that could be approved in as little as 10 minutes. The bank also says it writes to customers leaving fixed rates to offer them “competitive” interest rates.
The wave of refinancing – and the potential for deep discounts – comes after regulators were keen to promote greater transparency in the pricing of home loans, given the huge sums that households are spending on mortgage payments.
In what critics have dubbed a ‘loyalty tax’, banks routinely charge new borrowers lower rates than long-term customers: Australian Competition and Consumer Commission home loans survey 2020 has highlighted the potential to save thousands of dollars while shopping.
The ACCC has recommended that banks be required to give customers who took out loans more than three years ago a ‘prompt’ to see if they could save money by switching; a standardized mortgage release form; and a maximum time allowed for banks to process discharge requests. The former coalition government did not officially respond to the survey. The banks had reservations about some of these recommendations, but argued that data sharing enhanced mortgage competition.
Bankers have long said there is nothing wrong with attracting new customers with lower rates than their existing customers are paying, saying it is an inevitable product of capitalist competition.
Investors, however, are closely watching how the competition for customers develops. They worry that aggressive bank discounting could dampen the expected rebound in profit margins, which typically rise when interest rates rise.
Bank bosses have made it clear they expect mortgage competition to remain fierce as lenders throw large sums of money at consumers in an attempt to lure them into switching banks.
ANZ chief executive Shayne Elliott told radio station 3AW in July that repayment deals of $3,000 to $4,000 were common in the market, while ABC chief executive Matt Comyn , noted during the bank’s annual results that a bank offered a refund of $6,000. Although Comyn did not name the lender, NAB-owned Citi has a $6,000 repayment agreement.
Comyn said there had been a “significant escalation in pricing and cashback incentives,” but he also argued it was a risky time to pursue growth at all costs. The most recent cohort of borrowers to take on new loans at lower rates are also seen as the most vulnerable to rate hikes, and in this environment, Comyn argued the bank was happy to sacrifice some growth. .
“We are prepared to remain disciplined on pricing and risk and if that means for periods of time we grow below the market, then so be it,” Comyn said.
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