With Australian banks now under pressure to rein in lending to investors in the residential property market, mortgage experts believe that competition for owner-occupier loans is set to intensify.
Big banks such as Westpac and ANZ have relied heavily on investment borrowers to build their mortgage businesses in recent years, but recent changes to prudential rules by the Australian Prudential Regulation Authority are forcing them to restructure their home lending strategies.
Almost half of Westpac’s mortgage business is exposed to investment borrowers.
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For reasons of risk management and managing their regulatory costs, banks such as Westpac have begun to compete more aggressively for owner-occupiers in the last week.
While the mortgage rates of the major banks, including Westpac, are lagging way behind many non-bank lenders, they are adding other incentives to lure new entrants to the housing market.
This week, Westpac and its subsidiary brands (Bank of Melbourne, St George and Bank SA) began waiving the mortgage insurance costs on owner-occupiers borrowing up to 85 per cent on a property.
Since August 4, they also began offering a $2000 cash-back on most owner-occupier loans.
And rates on loans fixed for one, two, three and four years have been reduced by up to 0.3 per cent.
These incentives apply to both first homebuyers and existing borrowers looking to refinance.
The favourable pricing changes for owner-occupiers follow changes last month by Westpac that increased the cost of investment borrowing.
The purpose of highlighting these changes is not to endorse Westpac’s mortgage products but to highlight how regulatory pressures are driving big changes in the dynamics of the home lending market.
Mortgage brokers believe banks will throw up more incentives
John Flavell, the chief executive of Mortgage Choice, one of Australia’s largest home loan broking networks, believes more banks will soon sweeten their offers pitched at owner-occupiers.
“The major banks now have an appetite to increase the size of their owner-occupier mortgage books,” he said.
“What we are seeing with Westpac’s early moves is the competition for these types of mortgages heating up.”
The flipside of the renewed contest for first homebuyers is that price-leading non-bank lenders such as loans.com.au are expected to attract a greater share of new investment borrowers.
Lenders that do not operate as deposit-takers like loans.com.au are not subject to the capital rules that are imposed by APRA on banks and credit unions.
In this sense, they have more scope to grow in the investment home loan segment under the current regulatory atmosphere.
“There is no doubt that smaller lenders will look to increase the flow of business from investors in the near term,” Mr Flavell said.
“At some point, however, non-bank lenders may also come under pressure from the Australian Securities and Investments Commission to temper such growth.”
Non-banks still offer the lowest rates
With the major banks now marketing investor mortgages at above 5.6 per cent, smaller lenders are strategically placed to grow in this segment of the market as the following Canstar table shows.
Many of the lenders included in this table, such as loans.com.au and Homestar Finance, are consistently pricing mortgages at the sharp end of the market.
Its seems almost inevitable that some investment borrowers now with the major banks will gravitate to these cheaper providers.
“The table is a clear message that borrowers need to look outside the box when they are shopping for a mortgage,” said Canstar spokeswoman Justine Davies.
“Even if they don’t decide to go with a cheaper lender this information can be used to negotiate a better deal with the banks.”
A dilemma for the big banks
While APRA is steering the banks toward the owner-occupier segment, it has also increased the regulatory capital costs for the banks writing loans for first homebuyers.
To meet the new capital requirements the banks will each need to raise several billion dollars.
This means that the four major banks and Macquarie are now facing a dilemma.
They could pass on the extra capital costs to owner-occupiers and lose customers in their preferred part of the market or they could make other borrowers pick up the tab.
The jury is still out on which way they will go.
The banks have a third option: they could make shareholders subsidise competitive rates offered to owner-occupiers by issuing more shares.
Such moves would dilute the value of existing shares held by stockmarket investors.
Someone will have to pay before the new capital rules take effect next July.