Record refinancing amid speculation of an early rate rise

Almost $15 billion worth of home loans were switched to different lenders in May, as borrowers rush to lock in a better deal amid speculation of an earlier-than-expected interest rate hike.

Seasonally adjusted figures by the Australian Bureau of Statistics showed a record $14.9 billion worth of home loans were refinanced with a different bank during the month – $400,000 more than the previous record set a year earlier.

REA Group economist Paul Ryan said refinancing activity has surged since the pandemic began, with external refinancing activity – which is when someone switches an existing loan to a different lender – up 41% in May 2021 compared to pre-COVID levels.

“There was a large amount of refining activity last year when fixed mortgage rates fell substantially, which saw some four-year fixed rates fall below 2%,” Mr Ryan said.

Recent data from the RBA showed that, on average, the interest rate on new loans with a fixed rate of more than three years has been steadily rising since February as lenders prepare for an expected interest rate rise in 2024.

“I think those very, very low rates being retracted has spurred a lot of people to try and lock in those low rates while they’re still available,” Mr Ryan said.

The level of urgency, he said, may have been inflated further as several leading economists brought forward their predictions for an interest rate hike. However, the RBA maintains a move is unlikely until 2024.

The ABS found internal refinancing activity – when a borrower tops up an existing loan with the same lender – also reached a new high in May.

“The main factors that drive refinancing activity are interest rate falls, and housing price increases, which means people can withdraw equity,” Mr Ryan explained.

“We’ve got all of those factors affecting the market at the moment, which is why we’re seeing such high refinance activity.”

Other incentives driving borrowers to refinance

While banks have begun lifting their longer term four- and five-year fixed mortgage rates, competition is still fierce in the lending space.

Mortgages with a variable rate, or a fixed term of less than three years continued the downward trend during May, according to the RBA.

But lenders aren’t just using interest rates to lure in new customers.

Cashback deals, credit card rewards and lenders mortgage insurance (LMI) discounts are some of the strategies being used to get more borrowers onto the books.

Sydney homeowner Pitambar Subedi recently refinanced for the first time to take advantage of lower interest rates. He said a hefty cashback payment also sweetened the deal.

“I usually do a health-check of my mortgage every year, and this time my [Mortgage Choice] broker said there was a better deal somewhere else,” Mr Subedi said.

The electrician was able to get two cashback payments by refinancing both the family home and an investment property with a new lender.

“I fixed the rate on my investment property for two years and split my live-in property to part fixed, and part variable,” Mr Subedi said.

“The process was pretty easy, my broker helped me a lot.”

The majority of cashback incentives currently available are targeted at refinancers. Mr Ryan said interest rate reductions also tend to favour new business.

“Generally, mortgage rates fall the most for new loans relative to existing loans, so people are getting rewarded for going out there and refinancing,” he said.

“So that’s bringing a lot of people to market that maybe otherwise wouldn’t have if the benefits weren’t so large.”

Refinancing incentives don’t always deliver the best results over the life of the loan, so borrowers should discuss their options with a qualified mortgage broker before making the switch.

Homeowners tapping into equity as values swell

Record-low interest rates, government grants and a fear of missing out have driven property prices sharply higher. As a result, property owners have more equity to tap into.

A recent survey by realestate.com.au found one in four people looking to refinance were doing so to unlock equity in their home.

Mr Ryan said homeowners may be using some of that equity to invest in property.

“Property price increases will have instigated refinancing activities, so people are able to withdraw equity that they’ve gained and part of that may be related to investor activity coming back into the market,” Mr Ryan said.

According to the ABS, the value of new investor loans issued in May hit more than $9 billion, $1 billion more than the previous month.

ABS head of Finance and Wealth, Katherine Keenan said investor lending is now more than double that of a year ago, at the height of the COVID-19 uncertainty.

“The value of investor loan commitments rose 116% in the year to May 2021, after falling to a 20 year low in May 2020,” Ms Keenan said.

Mr Ryan said the recent increase in investor lending will be a source of concern for financial regulators, who in the past have implemented lending restrictions on investors to limit risky loans.

“They’re going to be looking at things like evidence of investors entering the market purely for capital gains rather than a more long-run investment,

“So, things like high LVR lending, lots of interest only lending and lots of lending at the limit of serviceability.”

But he said that’s still a way off.

“I don’t think we’re anywhere near that at the moment,” Mr Ryan said.

Economists at ANZ, however, anticipate banking regulator APRA to step in before the end of the year.

“Investor lending is accelerating, rising more than 30% over the past three months, suggesting that a speculative element is emerging in the market,” ANZ economist, Felicity Emmett said in a recent note.

“The regulators will want to avoid triggering a sharp turnaround in house prices, so we expect they will go lightly in the first instance,

“We expect APRA will announce hard macroprudential controls by the end of the year.”