Inflection point looms as refinance squeeze tightens
Data & Insights, People & Property

Inflection point looms as refinance squeeze tightens

By Danielle Tricarico • Apr 2023

For the first time in decades, banks find themselves facing a downturn fuelled by rising inflation, high interest rates, a looming mortgage ‘cliff’ and a customer base under increasing cost of living pressures.

Their biggest challenge in 2023 is restoring business banking momentum, cutting through intense retail banking competition and reducing customer ‘churn’.

Banks facing major turnover

As revealed in PEXA’s most recent Mortgage Insights report, which tracks loan refinancing volumes, the number of refinanced loans, with a new lender, climbed to record highs across Australia’s four largest states through 2022, as mortgagees responded rapidly to rising interest rates by seeking out cheaper loan arrangements and many choosing to switch lenders.

This trend has persisted in the first quarter of 2023, with the number of home loan-holders actively seeking to refinance (as at March 2023) increasing by 18.5% compared to the same time last year, and is up by a huge 67.5% from March 2021 figures.

Further illustrating this turnover, 70% of bank customers who refinanced their mortgage in the past six months did so with another bank, according to analysis by the Australian Banking Association (ABA).

Julie Toth, Chief Economist at PEXA said shopping around for a better deal on your mortgage is in homeowners’ best interests and makes good financial sense, potentially leading to significant savings with rates expected to continue climbing through 2023, increasing mortgage stress.

“Our research found that those that did refinance their loan saved an estimated $1,524 per year on mortgage repayments, and even more when they switched lenders, saving $1908 per year compared to $384 when refinancing with their existing lender,” said Julie, referencing data from PEXA’s September Refinancier Sentiment Research report which looked at homeowners’ attitudes and behaviours towards refinancing their loan.

Consumer pressure intensifying

As Julie outlined in a recent discussion with the The Age and the Sydney Morning Herald, the pressure being felt by loan-holders is clearly illustrated by pronounced spikes in PEXA’s refinance index, which last week showed the number of loans being refinanced was 22.8 per cent higher than the corresponding time period last year and second only to a record level from December.

The RBA estimates more than 800,000 fixed rate loans are due to expire during 2023 as they roll off their typical two-to-three-year fixed rate period. All of these fixed loans are being reset at a significantly higher cost – so it’s not surprising that we are seeing a spike in mortgagees taking the opportunity to shop around, either immediately or pre-emptively.”

While the RBA elected not to increase that cash rate at its last meeting, Julie believes that this is likely to be only a pause and not the peak in the current cycle of increases that have taken the cash rate from 0.1% last April to 3.6% today.

And as homeowners seek to combat the surging cost of living by getting a better deal and refinancing their mortgage, the heat will be on the banks to ensure they incentivise their customers to keep the faith.

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