Around half of fixed rate borrowers whose low-rate home loans are expiring over the next two years are planning to leave their current lender, but it's those customers who can't that might prove a bigger problem for the banks, new research finds.
The research, a survey of 1,641 mortgage brokers conducted for investment bank Barrenjoey over the past eight months, asked brokers three key questions.
Essentially, these were:
- 1.What percentage of your customers who took out a low-rate fixed loan during the COVID period do you expect to refinance with a different lender when the fixed rate ends?
- 2.What percentage of refinancing customers do you expect to be rejected due to falling property prices or reduced borrowing capacity as rates rise?
- 3.What percentage of your customers are unable to get the loan size they need to buy the home they want?
Barrenjoey banking analyst Jon Mott said the answers would concern bank bosses, and also highlight the problems confronting many home owners.
"With around $360 billion of fixed rate mortgages maturing this year many customers are facing an increase in interest rates from around 2 per cent towards 6 per cent," he wrote.
"With APRA requiring the banks to continue using a 3 per cent serviceability buffers, many customers who took out mortgages during 2020-21 are now likely unable to refinance their mortgages and are facing significant financial stress.
"Our survey indicates around 20-25 per cent of this cohort of mortgagors are in this predicament. This is consistent with estimates from NAB."
NAB has responded to the report, and said its chief financial officer recently estimated that between 15-20 per cent of borrowers were in this situation, with current estimates from the bank sitting at 16 per cent.
This group of borrowers unable to refinance their loans have been widely dubbed "mortgage prisoners".
Mr Mott said banks are likely to help many customers in this group to avoid default by putting some onto interest-only repayment periods or extending the term of the loan, both of which reduce repayments in the short-term but increase the cost of the loan over its life.
He also said banks may encourage some customers to sell their properties before they default.
However, he still expects a growing number of customers to fall behind on repayments and potentially default on their mortgage.
"We expect mortgage arrears to rise sharply over the next 12-18 months as these customers revert to higher interest rates and these loans season," Mr Mott predicted.
"In our view it is inevitable many customers will not be able to meet their higher repayments and a rise in credit impairment will likely be seen.
"That said, we believe it will take until around the end of this calendar year until we have a good indication as to how severe this impairment cycle is likely to be."
Bank profits hit by 'significant discounts'
The financial struggles of these customers are not only bad news for them, but also for bank profits, which Mr Mott believes will be weighed down by rising bad debts and provisions.
However, the banks face another challenge to their profits from the majority of their customers who are not in financial difficulty.
The survey showed around half of the customers on cheap fixed-rate loans were looking to refinance with another lender once their fixed term expired.
This is to escape the revert variable rates that fixed loans generally roll onto, which are usually above the banks' lowest discount offers for new customers.
Mr Mott said the banks are saying that they are hanging onto the majority of these customers, but he believes that must be coming at a cost.
"Early indications from the banks suggest retention rates are higher at around 80 per cent," he wrote.
"However, it is likely that significant discounts have been offered to retain these customers.
"The latest ABS statistics indicate around 47 per cent of housing commitments relate to external refinancing as opposed to new loans. This is the highest rate ever, exceeding the spike during the pandemic."
The final challenge for the banks is the collision between the bank regulator's 3 percentage point mortgage serviceability buffer and rising interest rates.
New borrowers now have to pass serviceability checks that test whether they could still afford repayments if mortgage interest rates rose to around 8.5 or 9 per cent, and many are failing.
"Our surveys suggest around 25-30 per cent of customers are now locked out of the housing market by reduced borrowing capacity, which is a key driver in the fall in mortgage commitments," Mr Mott observed.
"Interestingly these customers do not appear to be trading down to alternative properties but are sitting out of the market."
He believes that will see housing credit growth slow towards just 2 per cent over the coming year, in another headwind both for bank profits and the nascent real estate price recovery.
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