Australia’s big lenders milk new borrowers

Australia‘s major banks are relying on new borrowers to sustain their profits as they brace for more of their current customers to grapple with escalating borrowing expenses.

A close examination of mortgage rates reveals that lenders are accelerating rate hikes for new borrowers at a swifter pace than official increases in the cash rate. Fixed rates are also experiencing notable upward shifts.

Amidst mounting rates, banks are fortifying their mortgage portfolios against the prospect of escalating loan defaults, given the impact of rising rates on households. Paul Kofman, Dean of the Business and Economics Faculty at the University of Melbourne, noted that as inflation and interest rates surged, banks experienced substantial profit margin expansion. However, the current landscape reflects a readiness to provision for mortgage defaults.

The banks are becoming increasingly concerned about a surge in default rates due to the ongoing interest rate rises. Kofman added, “We’ve reached the peak of profit margins, and beyond this point, they are being eroded by bad debts.”

Initially, during the pandemic’s early stages, the banking sector weathered the storm. Subsequently, they capitalised on the inflationary phase by outpacing deposit rate increases with lending rate hikes, which augmented profit margins.

As the pace of rate hikes moderated, the banks shifted their focus to new customers in order to sustain profit margins. Notably, major banks have raised rates for new customers by an additional 0.32 percentage points beyond official cash rate increases since the year’s commencement, according to Finspo, a mortgage broker.

This development has led to an unusual scenario where advertised special rates are often higher than those offered to existing customers, creating confusion for mortgage holders.

The customary strategy of attracting new borrowers with more attractive rates than those for existing customers has thus been reversed.

However, if banks were to increase rates for existing customers at a swifter pace than official rate hikes, they would likely encounter substantial public and political pressure. Such a move could potentially place heavily indebted households into further financial distress.

The Australian Banking Association suggested that lenders might assist customers by restructuring loans, offering interest-only payments, extending loan terms, or providing payment deferrals.

The rise in fixed rates is also notable, although they exhibit less direct correlation to official cash rate fluctuations compared to variable rates.

Since the rate-hiking cycle began in May of the previous year, the Reserve Bank’s cash rate has surged from 0.1% to 4.1%, resulting in most mortgage rates surpassing 6%.

For an individual with a $750,000 home loan, adapting to variable rate changes could entail finding over $1,700 extra each month.

Commonwealth Bank, Australia’s largest lender, is poised to unveil its full-year results soon, shedding light on the sector’s profitability. The bank’s arrears and default figures will provide insight into the impact of rising borrowing costs on customers.

During its earlier half-year results this year, the Commonwealth Bank observed a significant spike in its chief gauge of profitability, net interest margins, reaching a historically robust level of 2.1%.

In response to queries about rate adjustments for new customers, a spokesperson for CBA clarified that such changes do not affect existing borrowers. The bank periodically revises rates for new home loan borrowings based on ongoing assessments of interest rates, market conditions, and funding costs.