Cheaper minnow mortgage lenders taking business from big banks

The dominance enjoyed by the big banks in the mortgage market has been loosened by their smaller rivals as competition moves from fixed-rate mortgages to variable rates.

Figures from PEXA, a platform for digital property settlement, show that for NSW and Victoria combined, the major banks and their subsidiaries went from adding 1575 more mortgages than they lost in March 2021, to losing more than 2600 last month.

By comparison, after adding 1060 mortgages in March 2021, non-major bank lenders saw their home loans business soar to a net 5787 last month.

Mike Gill, head of research at PEXA, which collects real-time property transactions on its e-conveyancing platform, says the big banks are losing ground to non-majors in both new home loans and mortgage refinancing.

This was driven by the major banks increasing fixed loan rates in expectation of interest rate rises, together with non-majors competing strongly on variable rate loans, he says.

We suspect borrowers were also attracted to non-major lenders, given they may offer quicker approval times with an increased likelihood of loan approval, compared to the major banks, with their tighter lending requirements, he says.

Still, there is growing evidence that big bank mortgage approval turnaround times have improved. The Broker Pulse report from Momentum Intelligence shows a steady improvement.

PEXA figures show non-majors are doing well in new mortgages, and particularly well in refinanced mortgages. Most of the competition for new business by lenders is now with variable rates, as fixed rates have moved higher in advance of looming official interest rate hikes.

Australian Bureau of Statistics lending indicators show that the popularity of fixed rates, which peaked during 2021, is now sliding. The proportion of fixed rate loans funded in February was just 28 per cent, down from a peak in July 2021 of 46 per cent.

Fixed rate mortgages are usually more attractive to home loan borrowers when interest rates are low.

Borrowers wanting to fix their rate now are likely to pay at least one percentage point more than current variable rates for a one-year term, with an even bigger gap for longer terms.

Sally Tindall, research director at RateCity, says many first home buyers go to the bank they know. However, those refinancing their mortgage tend to be a bit more rate hungry and often prefer to shop around for the best rate available.

At the end of the day, one of the main reasons for refinancing is to get a better rate, Tindall says.

The major banks are becoming more competitive on their variable rates, but still often fall behind the rates offered by non-majors.

The big banks might have walked away from competitive fixed rates, however, they have been forced to improve their variable rates to keep new business coming in the door, Tindall says.

All four big banks have cut their lowest variable rates in the past three months, in a bid to become more competitive. ANZ did so in February and CBA, Westpac and NAB in March – but usually only for new customers on their basic variable rates.

Anyone who has been loyal to their big bank lender is probably getting a raw deal, unless they pick up the phone and haggle Tindall says.

She suspects the bank majors have been forced to lower their variable rates as a result of the highly competitive rates being offered by the bank minnows.

There are still 40 lenders offering at least one variable rate that is lower than the big four banks’ lowest variable rates, Tindall says.

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