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More mortgage rate cuts expected as major lenders rebuild their market share

This article originally appeared on Australian Financial Review on 6/3/18.

Major lenders are expected to follow the Commonwealth Bank of Australia’s latest round of interest-only mortgage cuts after losing market share because of massively over-estimating the impact of lending caps on their loan books, despite regulatory fears about rising debt and prices, according to analysts.

“Expect others to follow,” said Steve Mickenbecker, group executive for financial services at Canstar, which monitors rates and charges for financial service products, about the CBA’s recent cuts.

Big four lenders started losing market share to smaller lenders and regulation-lite non-bank financial institutions when they slammed on the brakes to meet Australian Prudential Regulation Authority’s 30 per cent cap on interest-only loans.

CBA’s CEO-elect, Matt Comyn, recently flagged plans to rebuild interest-only market share after over-shooting the regulatory 30 per cent target and ending in the low 20s.

Well under lending caps

The bank’s mortgage growth in the 12 months to December 31 was about 5 per cent, compared with about 6 per cent system growth and more than 11 per cent for non-bank financial institutions (NBFI).

Westpac Group, which has the highest exposure to interest-only loans with about 50 per cent of its loan book, also reduced new interest-only flows to about 22 per cent and has also begun selectively cutting rates.

Australia and New Zealand Banking Group, which announced only 14 per cent of loans during the most recent quarter were interest-only, is expected to follow. Other lenders have also indicated they are well under lending caps.

CBA, the nation’s largest mortgage lender, has cut a range of fixed rate interest-only home loans ranging from one to four years by up to 50 basis points. For example, a two-year fixed interest-only investment home loan has a headline rate of 4.34 per cent.

“NBFI lending appears to have taken up the slack (of property buyer demand),” said Stuart Jackson, private portfolio manager for Montgomery Investment Management, about the majors losing market share to other lenders and CBA’s response.

“This is not great news because either the macro-prudential restrictions put (the banks) at a competitive disadvantage to the NBFIs, resulting in ongoing reductions in market share, or the risks to the financial system that the macro-prudential regulations are intended to fix are not addressed due to the shift in lending demand to the NBFIs,” Mr Jackson said.

Cutting interest-only product rates

Mortgage Choice, the nation’s third largest mortgage broker,  also said decreasing volumes from the major lenders had been offset by demand for loans from much cheaper smaller banks and other lenders.

For example, an average variable rate, owner occupier rate offered by a big four is 52 basis points more expensive to a similar loan on offer to a NBFI for a $1m mortgage with a 20 per cent deposit, according to Canstar analysis.

The gap widens to 82 basis points for the same size investor, interest-only loan on the same borrowing terms, the analysis show.

Mortgage brokers, who act as an intermediary between lenders and borrowers, claim lenders are lowering rates but toughening other terms and conditions, such as long-term capacity to service the loan.

Bankwest, and BlueBay Home Loans recently cut rates by up to 20 basis points, reduced investment loan loadings for low documentation loans and boosted features for borrowers who might not qualify with big four borrowers.

ING, Macquarie Bank and Virgin Money have also reduced rates on their interest-only products.

Allowing the cheaper CBA interest-only rates available to existing CBA borrowers could also create an option for borrowers wanting to defer the switch to higher monthly repayment principal and interest, according to analysts.

“This could ease the pain for many interest-only property buyers looking for a way to defer switching back to principal and interest,” added Mr Mickenbecker.

CBA allow investors to increase their interest-only term to 10 years and five years for owner occupiers.

The rate of CBA’s conversion of interest-only loans to principal and interest is expected to continue rising into the second half of next year, according to the bank’s recent results.

APRA recently reaffirmed its commitment to maintaining the 30 per cent limit on new lending to borrowers who are only repaying interest.

Lowering rates is likely to concern prudential regulators who are concerned about record levels of household debt, static incomes and high prices and want borrowers to pay down loan principal to lower the risk of financial stress.