Non-major banking heads reflect on the year 2023

The year 2023 has been another tumultuous one for the lending market. The inflation battle continued to be a key influence on the lending market – upsetting many economists’ forecasts for the cash rate over the year. At the beginning of the year, forecasts had suggested that rate cuts would be appearing before year end, but this never manifested. Indeed, many now believe rates will continue to rise into early 2024 to try and dampen the high inflation.

The rapidity of change this year was noted by the heads of third party at The Adviser’s Non-Major Bank Roundtable luncheon in October. Reflecting on the year that was, the panellists outlined how each quarter brought with it new challenges and opportunities.

Cashbacks driving refinancing boom

In the first three months of the calendar year, for example, the lending market was dominated by refinancing as borrowers were concerned with saving money amid the rising rate environment and persistently high inflation.

Speaking of the trend at The Adviser’s Non-Major Bank Roundtable in October, Paul Herbert, AMP Bank’s head of intermediary distribution and finance, said that brokers had been invaluable in helping prepare borrowers for their changing repayments.

He said: “Some of the best practice we’ve seen is where brokers are not just having the straightforward conversation about rates going up, but are having ‘value-add’ conversations with their clients about how their repayments are changing and how their family budgets might be changing; they’ve been helping them start thinking about the way that will impact their lifestyles and spending habits.”

Large numbers of borrowers were also rolling off their super low fixed rates onto higher rates and were looking for the best deal possible.

According to James Cameron, the head of distribution at MyState Bank, “it had been commonplace” to see lenders offering cashbacks to those refinancing at the beginning of the year (and the years prior), which had been “skewing the refinancing market”. However, as more lenders – including MyState Bank – moved to withdraw cashbacks for refinancing, this cooled demand.

George Srbinovski, head of broker distribution at ubank, said: “We saw quite a strong refinance market at the beginning of the year and that’s started to slowly change as the year progresses and the cashbacks dwindle.”

Indeed, by the second quarter, things were looking quite different. Glenn Gibson, (former) head of sales & distribution at ING Australia, elaborated: “On the week of 30 June, the volume of refinance lodgements that went through all lenders dropped by 18 per cent. It used to be 65 per cent refinance and 35 per cent purchase. The week after 30 June, it flipped. I think that’s because the majority of cashbacks finished on the 30 June.”

The removal and reduction of cashback offers also translated into flows of business away from the major banks to the non-majors. According to AFG’s Index, non-majors were receiving about 39 per cent of AFG broker flows in the last quarter of the financial year, but this increased to 42.5 per cent – the highest proportion in over a year – by the new financial year.

MyState’s Mr Cameron stated: “It’s good to see that we’re getting to more normality and not as many lenders are offering it [cashbacks].”

While refinancing was running hot, new loan commitment activity dropped. It hit a five-year low in January 2023 as COVID-19 stimulus measures were wound down and borrowing capacity reduced due to rising interest rates, which further dampened overall demand for new housing loans.

But purchasers of all kinds were starting to come back into market by July.

Ian Rakhit, the general manager, third party at Bankwest, commented: “The housing market has been experiencing increased pressures in the current cost-of-living environment, which resulted in increased refinancing and repricing activity in the early part of the year.

“That changed around the middle of the year, as an improved lending proposition for investors resulted in an increase in activity among those customers.”

The surprisingly robust housing market stoked the fear-of-missing-out flames. First home buyer activity also started growing once again, a trend that continued into the new financial year as more places were made available through the government’s (ever-expanding) Home Guarantee Scheme.

Borrowers aren’t falling off a cliff

While many were laser-focused on what would happen when the fixed-rate cliff arrived in the third quarter, the feared uptick in arrears didn’t manifest. Many borrowers had been reducing their discretionary spending as cost-of-living pressures bit, while a large proportion were able to pull on the savings they had accumulated over the lockdown periods to manage higher repayments.

Darren Kasehagen, general manager of third-party banking at Bendigo and Adelaide Bank, explained: “Fixed rates have been rolling off, but I don’t think we’ve seen the cliff that we thought we would have 12 months ago. From an industry perspective, we also haven’t seen a material rise in arrears or losses either, though it may still be early days.”

Suzanne Wood, state general manager for residential mortgage broker at Westpac Group (representing St.George Bank), agreed, stating: “The majority of customers have adjusted and are finding it manageable. We haven’t seen an uptick in arrears that was anticipated by many in the market.”

By spring, the property market was red hot once again. Auction activity was booming and borrower confidence was increasing as the long run of rate hikes looked close to conclusion.

Johnny Lockwood, the general manager broker, credit cards & loyalty at BOQ Group (including BOQ, ME Bank, and Virgin Money), stated that the lending mix had been “swinging back to purchases” and refinance activity had cooled. However, he added that rather than refinancing cooling due to lack of demand, “it’s also because lenders are becoming much better at offering a great rate for their customers, so we’re seeing more borrowers staying with their existing lender”.

Serviceability bites

Towards the end of the year, as it became clear that interest rates would continue to rise and servicing became harder to pass, mortgage inquiry started to soften once again – cooling from the midyear peak.

Mr Lockwood added that the run of rate hikes, high house prices, and cost-of-living pressures have meant that “serviceability is much more of a factor now that house prices are still going up at a rapid rate”.

“People are much more focused on whether they have the serviceability to actually borrow what they want. It’s much more of a strain with interest rates going up,” he said.

The roundtable panellists agreed that servicing would continue to be a key point of focus over the summer period – with brokers a critical factor to ensuring that borrowers not only understand their financial position, but that they can find a lender who may be able to help them.

Given the non-majors’ reliance on the third-party channel, nearly all of the non-major banks have been investing heavily in the channel this year.

Some of the updates rolled out to brokers this year, include: