A researcher has claimed mortgages are more profitable than ever, and predicts out-of-cycle cuts are "inevitable".
In a note to investors, UBS analyst John Mott has claimed that, while Australian banks were losing money on mortgages just 12 months ago, profits have turned around to represent record returns.
"Over the last twelve months a rapid reduction in credit spreads and mortgage repricing implies that writing a new wholesale funded home loan has never been more profitable," Mott said.
The UBS report has estimated that banks are generating around 88bps of profit on a new mortgage. As a result, Mott predicted banks would be forced to make out-of cycle cuts.
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"If the global economy continues to improve, funding markets keep rallying and deposit competition continues to ease we believe banks will come under pressure to initiate out-ofcycle rate cuts. This is likely to be exacerbated by the political environment," he said.
Should banks fail to move out-of-cycle to cut rates in the wake of easing funding pressures, Mott said they could risk "political interference".
As funding pressures ease, Mott has also predicted the Australian mortgage market could see an expanding group of players.
"We believe if debt markets continue to rally opportunities will open up for new
entrants to come back into the mortgage market," Mott said.
Mott pointed to YBR's recent origination agreement with Macquarie, and said improving market conditions could see new non-bank lenders enter the market. But Mott claimed more sustainable funding arrangements would be crucial to any new non-ADIs.
"We believe that market participants and regulators will have learned from the experiences of Rams, Northern Rock and other player heavily reliant on wholesale funding & RMBS during the financial crisis," he said.
