Interest rate increases put the brakes on lending

(ASX:AFG) Data released from Australian Finance Group Ltd (AFG) for the second quarter of FY23 shows home lending volumes are down 18.4% on the same period last year as rapidly rising interest rates impact the market.  

AFG mortgage brokers lodged $20.1 billion for the quarter with the biggest drops in activity seen on the eastern seaboard. New South Wales volumes were down 23%, Queensland 19.6% and Victoria was 18.3% below Q2 22. 

AFG CEO David Bailey explained the results. “As anticipated, the dramatic increase in interest rates since May 2022 has slowed the market. The Christmas period is traditionally quieter, however natural disasters, global uncertainty and rising prices have had, and will continue to have, a substantial impact on household budgets. The challenge for the central bank is to reduce inflationary pressures without stalling the economy.” 

“Fixed Rate volumes were 34.0% at this time last year, they now sit at 4.8% and were 3.6% last quarter. Fixed Rate activity this financial year is at the lowest level ever reported in the AFG Index. The last time Fixed Rate volumes were in single digits was 2011,” he said. 

As property prices declined, the average loan size also dropped by almost $24,000 on the same period last year. 

The most active customers in the market are those seeking to refinance, with volumes up from 25% in the same period last year, to 31% for the quarter.  First Home Buyers are feeling the impact of reduced borrowing capacity and have dropped from 13% to 11% in Q2 23. 

A further sign of the market slowing is a drop in Upgraders, down from 43% to 39% year on year. 

“Significant cash back offers for new customers are driving inquiry,” said Mr Bailey.  “The arbitrage being enjoyed between an increase in lending rates and a correspondingly very slow increase in deposit rates, on the back of the once in a generation Term Funding Facility (TFF), can be seen in the market share increases for major lenders and their stable of brands, up 6.1% on same period last year from 53.5% to 59.6%.”  

“The chase for market share by the majors offering cashback and then (ultimately) charging customers a higher rate once they are an existing customer, is disappointing,” said Mr Bailey. “A more equitable action would be for those lenders to use those funds to reduce interest rates across the board for all customers.” 

The non-major lenders did, however, enjoy a small win for the quarter, up from 39.23% in Q1 23 to 40.40%. This was largely driven by Macquarie, who rose from 10.35% to 12.13%.  Bank Australia, Great Southern Bank and Suncorp also recorded market share increases. “Macquarie’s result provides evidence that you don’t need to throw cash at customers to obtain business if the overall proposition to consumers is strong,” he said.  “As the TFF runs off, we expect the non-major lenders to be in a better position to compete in the coming months.” 

“Individual circumstances are assessed differently by lenders, and lenders are not offering the same rates to new and existing customers. Low introductory rates and cashback offers often come at the expense of permanent rate discounts for loyal customers.  Having insight into which lender may be the right fit for your needs in this rapidly shifting market is vital to a consumer looking for finance.  A mortgage broker is uniquely placed to have that information,” he concluded. 

View full report here

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