December’s data was a story of huge gross churn, Cotality chief property economist Kelvin Davidson says.
Photo: RNZ
Home loan borrowers are switching banks in record numbers, chasing cash back incentives.
But who’s paying the price?
Reserve Bank data shows there was $14.1 billion of home loan lending in December, $3.6b more than the previous strongest month, which was March 2021.
Cotality chief property economist Kelvin Davidson said it was a “large spike” in lending activity, for both owner-occupiers and investors.
He said some of it was for people buying houses but the bulk of the activity came from people switching banks.
There was $5.8b in home loan lending refinanced in the month, more than double the previous high. Switches made up 41 percent of the total movement of lending, compared to the previous highest level of 30 percent in June.
Davidson said it was all driven by increased “cashback” activity – where banks try to tempt borrowers in by offering them a percentage of their loan total, in cash.
“Remember that the banks were all offering 1.5 percent cash for lending for a period of time in November, which then fed into December’s strength once the loans had actually been drawn down.”
Cotality chief property economist Kelvin Davidson.
Photo: SUPPLIED
Davidson said it seemed that borrowers with large loans and large incomes were playing a key role in the activity.
“The share of lending being done at a high debt-to-income lending (DTI) actually dropped fairly sharply in December; or in other words, a lot of lending or switching was done at lower DTIs. For example, in relation to investment collateral, high DTI loans fell from nearly 17 percent of the total in November before exemptions to around 12 percent in December.”
He said December’s data was a story of “huge gross churn”.
“Borrowers will have been the winners, although some banks may have gained market share.”
Not every borrower benefits?
But chief executive at mortgage broking firm Squirrel, David Cunningham, said not every borrower would benefit.
Those who could move banks would get the extra cash, but those who were not able to could end up paying a higher price.
People usually cannot move without paying break fees if some of their lending is on a fixed term, or for a number of years after they accept a cash back offer.
“What you end up with is your new customers get their 1.5 percent cashback, but existing customers go well, hold on, why are they getting this deal?”
People who could move might have decided to take up the offer at another bank instead, he said, creating a giant “pass the parcel” scenario of borrowers.
He said it left the question of what fixed rates the banks would be offering if they were not funding cash backs.
“I’d argue we would have got the one-year down at four percent, but cash backs have become the new battleground.”
He said banks no longer tried to compete with lower interest rates to get new business.
Those lower interest rates would also benefit existing borrowers who would be able to claim them when they came to refix even part of their mortgage, and they would not have to change banks to do so.
But Claire Matthews, a banking expert at Massey University, was not so sure that existing borrowers were losing out.
“I’m not convinced that cashbacks would be having a significant impact on interest rates because they are only generally available to a subset of customers, and they are a standard time of marketing tool to attract new customers.
“Despite cashbacks, I think banks do still compete on interest rates, because that is still a key driver for borrowers given the longer impact and they will be important to a large portion of customers. And if they don’t qualify for the cashback, borrowers can negotiate with their bank for a better deal.”
ANZ, which initiated the 1.5 percent cashback offer, said it was committed to offering competitive home loan rates, too, for existing borrowers and new customers.
“Customers consider a number of things when choosing who to get a home loan from – pricing, approval times and other incentives on offer. Cash contributions give customers extra support upfront, helping with the cost of moving, refinancing or other expenses.
“Our recent cash contribution campaign was distinct from our choices on interest rate settings. We saw strong demand for the cash contribution campaign but for commercial reasons we cannot release details of specific amounts.”
BNZ said it would look at each customer’s situation individually to ensure it was meeting their needs and giving them the best overall value.
“Cashbacks are one tool that can help customers with costs when purchasing their first home, moving house, or switching banks,” general manager of home lending product James Leydon said.
“We currently have a cashback offer for first home buyers, offering at least $5000 cash back on new home loans of $250,000 or more, even with a deposit as low as 5 percent.”
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