As an indication that competition is waning among the top lenders and financing costs are rising, Westpac has followed suit by raising interest rates for new customers. Westpac followed the lead of other banks in raising its base mortgage rates by 0.1 percentage point despite the fact that the Reserve Bank did not hike official cash rates this month, making it ten consecutive rises.
Mortgage Competition Relaxing
Although the rate of increase in new mortgages has slowed, some institutions are beginning to show symptoms of competition relaxing. “In the absence of a Reserve Bank cash rate increase this month, Westpac is proactively managing the future interest margin of its home loan portfolio,” advised Kevin Orchard of Orchard Lending. However, the rise has not been passed on to current customers, whose prices were not changed following the April 4 meeting.
Commonwealth Bank confirmed last month that lenders were writing loans below the cost of capital, while Westpac CEO Peter King described the current mortgage market as the most competitive he had ever seen. As a result, banks’ profit margins have narrowed and their returns have suffered as refinancing activity has increased and new loans have slowed.
Mortgage Refinancing Discounts
According to the most recent figures from the Australian Bureau of Statistics, mortgage refinancing reached a record $19.9 billion in February, while new loans declined by 0.9%. The so-called “mortgage cliff” has fueled the current wave of refinancing as homeowners take advantage of historically low fixed interest rates.
To attract borrowers switching from fixed-rate loans, financial institutions have been giving attractive discounts of up to one percentage point on new mortgages, or the “discount between their front book” of new loans and their “back book” of current loans.
Kevin Orchard, director of Orchard Lending, speculated that the rise in front book pricing was caused by banks’ needing to pay more for deposits and negotiate increasingly unpredictable offshore markets. The major financial institutions have been competing fiercely for new clients for months and Kevin has seen a gradual decline in traditionally high levels of competitiveness. As the growing cost of capital puts pressure on the banking industry, “all four major banks have now walked back some of their new customer discounts.”
New To Bank Discount Mortgage Rates
He did caution that Australia’s four main banks—Commonwealth Bank, Westpac, National Australia Bank, and ANZ—are still giving exceptionally competitive rates and cash-back incentives, despite the rises ranging from 0.1 percentage point to 0.7 percentage point.
Westpac’s variable rate is as low as 5.24% with an introductory discount of 0.40% for the first two years. That’s still a pretty competitive offering in the near term,” Ms. Tindall said of the offer of $3,000 in cash back to switch refinancers.