Home loans are being approved much faster but rates on longer-term fixed-rate mortgages are on the up as banks prepare for a cost hike.
That’s what we learned this week as Australia’s bankers opened their books for public viewing, reporting soaring profits as households and businesses emerged from the pandemic hungry for loans.
The big four banks – Commonwealth, ANZ, Westpac and NAB – booked combined after-tax profits of $13.4 billion over the six months to March, up more than 50 per cent on last year.
The eye-watering profits smashed market expectations and were driven by record levels of new housing loan commitments, which surged 55 per cent in the year to March, lighting a rocket under housing prices.
The stronger-than-expected economic recovery also drove down credit impairment expenses – the money banks set aside for bad loans – which fell 102 per cent to just $110 million.
But it’s not all plain sailing for our banks.
Low interest rates, increased competition from non-bank lenders, and a strong appetite for fixed-rate mortgages have heaped pressure on their profit margins.
Loan approvals speeding up
The extra competition spells good news for you, though.
Among other things, it has forced banks to speed up their home loan approval times to win over new customers, making it easier for buyers to snap up new properties that come onto the market.
NAB, for example, reduced its approval times by 51 per cent over the six months to March, and even that didn’t turn around its falling market share.
Tim Dring, banking and capital markets leader at EY Oceania, said the big banks are investing so much into improving their lending services that they are now winding back their advertising campaigns.
“Buyers want some certainty that banks will find them a credit line if they’re successful in their purchases, so [the banks] have a really good chance to win some hearts and minds,” Mr Dring told The New Daily.
Meanwhile, Sam Garland, banking and capital markets leader at PwC, said the banks had a laser-focus on service to cash in on the post-pandemic boom.
“This is a time of transition between a post-GFC era coming to an end and a distinctly new age beginning,” he said in a statement on Thursday.
“[Australians] are looking to their institutions to respond to and address some of our most profound and longstanding challenges.”
Fixed-term loans jump
One feature of this new era in banking is much higher levels of fixed-rate home loans, which increased to 41 per cent of new housing finance in March.
The popularity of fixed-rate mortgages is being driven by the cost of money: Interest rates have fallen to record lows and the RBA has repeatedly said a rate hike is unlikely until at least 2024.
Fixed-rate loans ending before 2024 have exploded thanks to that cost certainty, with the number of two-year deals under 2 per cent more than doubling to 71 since the start of the year.
But longer fixed-rate loans are becoming more expensive, as banks prepare for a cost hike when funding from the Reserve Bank dries up and interest rates eventually rise.
The RBA has outlaid hundreds of billions of dollars in low-cost funding to the big banks under its Term Funding Facility (TFF) during the pandemic, but those credit lines are nearly gone and will expire entirely in June.
As we move closer to that deadline, four-year home loans advertised under 2 per cent are disappearing, down from 32 at the start of the year to just six in April, according to consumer comparison site RateCity.
Mr Dring said banks are approaching a “cost cliff”, where they’ll increasingly need to use private markets for funding instead of the RBA.
That will make lending more expensive, increasing home loan rates for customers.
“Banks are bracing for that potential increase in funding costs and are trying to lock in those margins at the moment,” he said.
It means if you’re looking to refinance your home loan you should probably get your skates on.
Investors are back
The uptick in four-year loan rates comes as property prices continue rocketing upwards, putting additional pressure on first-home buyers attempting to break into the market.
National house prices rose at the fastest rate since 1988 in March (2.8 per cent), and then increased by a further 1.8 per cent in April.
Prices are now 7.7 per cent higher than they were at the end of last year.
Although price growth is likely to moderate in the coming months, that’s primarily because first-home buyers are increasingly being priced out of the market.
And investors have realised there’s plenty of money to be made and flocked back to the market.
They took out 12.7 per cent more loans in March than in February, the biggest monthly jump since 2003, according to ABS data published on Tuesday.
New loans to first-home buyers, meanwhile, fell 3.1 per cent in March.
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