Australia’s largest lender says its experiencing historically high levels of refinancing activity as homeowners move to lock in ultra-low interest rates
It comes as a recent survey by realestate.com.au revealed low interest rates are front of mind for property seekers, with about 1.5 million Australians currently looking to refinance.
Realestate.com.au’s latest Property Seeker report, which surveyed 6700 Australians in December 2020, showed 50% of those wanting to refinance were seeking a more competitive rate, while one in four were doing so to unlock equity in their home or to consolidate debts.
Australia’s big four banks have noted a surge in demand for fixed rate home loans – through both new mortgages and refinancing – since last year, when the Reserve Bank of Australia cut the official cash rate to a record low of 0.1% in response to the coronavirus downturn.
Generally, lenders have lowered fixed borrowing rates by more than variable mortgage rates, with some four-year fixed rates temporarily falling below 2% per annum.
However, in recent months a growing number of lenders have moved to increase their longer-term, four- and five-year fixed rate mortgages amid expectations the RBA may begin raising the official cash rate from 2024.
According to comparison site RateCity, 30 lenders have hiked at least one four-year fixed rate in the last two months.
Tuesday’s federal budget also prompted speculation the RBA may be forced to raise interest rates even sooner if the tens of billions of dollars’ worth of fiscal stimulus pushes unemployment down faster than expected, leading to higher inflation.
Smartline Personal Mortgage Advisers CEO Sam Boer said pressure has been building on the banks.
“There is certainly some upwards pressure on the cost of funds for banks. In particular, the bond yield on four-, five- and 10-year fixed rates is picking up, which is putting pressure on lenders to increase these longer-term rates,” said Mr Boer.
“As this trend strengthens, and the pressure mounts, we could see more lenders increase these rates and by a greater margin,” he said.
‘Massive’ shift to lock in low interest rates
The latest lending data from the Australian Bureau of Statistics showed the value of new home loans excluding refinancing hit the highest level on record in March as more households took on a mortgage amid a backdrop of low interest rates, government stimulus and rising property prices.
Internal data from Australia’s largest lender, the Commonwealth Bank showed more than 45% of new lending is occurring at fixed rates.
“This is a high share by historical standards,” CBA economist Kristina Clifton said in a research note.
Existing mortgage holders are also making the shift into fixed rate loans, according to CBA.
“Refinancing activity is running at a high level for both owner‑occupiers and investors,” Ms Clifton said.
“Households are refinancing to lock in these lower fixed rates,” she added.
It follows recent comments by the bank’s CEO Matt Comyn, who told a parliamentary committee in April that the bank has “seen a high proportion of customers moving to fixed rates, where they were being offered,” said Mr Comyn.
“There’s lots of competition to secure new borrowers. We’ve seen the highest level of refinancing in the market that I think we’ve ever seen,” he said.
Shayne Elliott, the chief executive of Australia’s third largest lender ANZ, also noted a “massive shift into fixed rate”. More than 40% of ANZ’s Australian home loan lending flow in the first half was in fixed-rate loans.
“I mean, fixed rate used to be sort of 15% of flow and now it’s 40%,” Mr Elliott told investors last week, after the bank reported a first half cash profit of $2.9 billion.
“A lot of that is just our customers who’ve already got a relationship with the bank, who’ve got a standard variable [rate] moving to fixed,” he said.
The bank said one-to-three-year fixed rate periods were the most popular between October 2020 and the end of March 2021.
Mr Boer explained that longer-term fixed rates “aren’t the main game for banks”.
“Most borrowers prefer one-, two- or three-year fixed rates because they come with a shorter commitment. As we know, if your plans or circumstances change during the fixed-rate term and you need to change your loan, the break fees can be substantial,” he said.
Home buyers aren’t afraid to shop around for a better rate
The competitive environment appears to be driving homeowners to shop around for a better deal, with one in three (34%) respondents to the Property Seeker survey having refinanced within the past two years, up from 28% in 2019.
“Low interest rates along with special offers and incentives offered by other lenders are certainly enticing some homeowners to consider refinancing their existing home loans, particularly those who have already been through the process before,” said REA Group market research and insights manager Kirstin Hodgson.
One in five homeowners were planning to refinance for the first time.
“This year we are also seeing a higher proportion of homeowners looking to refinance to access equity in their properties, which they may be using to make improvements to their home,” said Ms Hodgson.
Increased property values, combined with government stimulus, flexible working arrangements and international travel bans have sparked a renovation boom.
While most respondents intended to use savings to fund their home improvements, about 12% of those looking to renovate said they would pay for the improvements by refinancing.
Speak to your Smartline Adviser
On the surface, the decision whether to fix your interest rate could appear to simply be a case of guessing whether you expect interest rates to increase or decrease over the next few years, but there are a lot of other important considerations to take into account.
Fixed-rate mortgages allow more certainty around knowing exactly what your repayments will be but don’t allow you to make additional repayments during the fixed-rate term like a variable rate loan.
You can always fix a portion of your loan if you want to reduce your exposure to increasing interest rates and still retain some of the flexibility that comes with variable rates, through a split rate loan.
“Borrowers need to speak to their broker now,” said Mr Boer.
“If a longer-term fixed rate is the right choice – and of course, it depends on a borrower’s circumstances and longer-term plans – then now is a sensible time to lock one in. You could be looking at an opportunity to make substantial savings.
“However, I would certainly recommend talking to your financial adviser as well, so you don’t wind up in a commitment you regret,” he said.
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DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.