Interest rate rises put the brakes on loan volumes

RBA interest rate levers being applied to the home loan market are having the desired effect, with new data from broker aggregator AFG showing that new loan volumes have fallen 4% in the first quarter of the FY23.

AFG CEO David Bailey (pictured above) said Australian mortgage customers had been hit between the eyes over the past six months with interest rate hikes being super-sized to slow the level of activity in the market.

“With interest rate rises still being absorbed, we would argue there is a need for a ‘wait and see’ approach by the RBA as the impact starts to flow through,” Bailey said.

Read more: How many homeowners are worried about rate rises?

“AFG recorded $21.5 billion in home loan lodgements for the first quarter of the new financial year, with Western Australia recording the biggest drop of 5.62%, followed by New South Wales at 5.13%. Loan sizes are also down in line with rising rates and affordability.”

Bailey said the average loan size nationally was currently sitting at $596,000, a $15,000 drop and the lowest level since the final quarter of 2021.

“Significantly, NSW was down $33,000 while South Australia defied the trend and increased by $2,000. Loan-to-value ratios increased slightly to 65.6%,” he said.

“After benefitting from the government’s term funding facility through the pandemic, the major lenders are holding back on passing on full rate rises to deposit holders and using their balance sheet strength to track the RBA increases.

“Non-major lenders, who primarily rely on RMBS and international money markets for funding, are feeling the pinch as they are compelled to increase rates above the official cash rate.”

Bailey said the big four banks and their associated brands (now including Citibank), lifted their market share by 4.38% to 60.77%.

“ANZ saw a significant uplift from 10.90% to 14.82% for the quarter and CBA and their affiliate Bankwest also increased market share from a combined 18.12% to 20.33%,” he said.

“The importance of a competitive lending market cannot be underestimated in driving affordability.  The non-major lenders have slipped back to their lowest level since the final quarter of 2020 at 39.23% of the market.”

Read next: AFG enjoys 20% earnings growth

Bailey said the broker channel, which was now responsible for 68% of the market, was vital to ensure the non-majors could continue to compete.

“The Westpac Group including Bank of Melbourne, Bank SA and St George was down 3.47% [in market share] to 14.89%, while the NAB group, including subsidiaries ubank and Citibank from this quarter, lifted from 8.95% to 10.72%,” he said.

“Australia’s brief love affair with fixed rate mortgages during the height of the pandemic has well and truly ended, with customers opting for a fixed rate product plummeting to 3.6% - the lowest  level since we commenced reporting.”

Bailey said in a hunt for savings, customers were opting for no frills basic variable home loans.

“These products are at their highest level in more than a decade at 24.4%,” he said.

“The slowdown has been good news for lender turnaround times, with the average number of days until formal approval at its lowest level since AFG reporting began in 2018, to now be averaging 17.2 days.”