Rate cuts may trigger the next mortgage war, warns analyst

Earlier this year, banks fiercely vied for refinancing by offering cashback incentives to attract borrowers from their current lenders as refinances surged.

Among the big four banks, ANZ remains the sole major bank continuing cashback deals, though they reduced incentives from 26 August 2023.

However, with the Commonwealth Bank’s recent market share decline, Mr Young cautioned that this could trigger a resurgence of “mortgage wars”.

If CBA, as the largest bank, decides to regain market share, it could reignite the competition, although cashback incentives may not be the method of choice given the associated losses, he said.

“I think they’re probably dead and buried for a while,” Mr Young said.

Competitive interest rates are expected to be the banks’ next move to regain market share, led by CBA.

Furthermore, banks are increasingly delegating distribution to mortgage brokers, with the expected trend to continue.

He anticipates brokers handling the majority of home loans, asset finance and commercial lending are on track to reach up to 90 per cent of the market share.

This shift is partly due to aggressive software and technology enhancements by major aggregators.

Software capabilities have expanded considerably and the industry has shifted toward a focus on software-driven value, he noted.

Additionally, smaller boutique aggregators are re-emerging, emphasising personalised service and business support, accompanied by access to software.

These trends are expected to persist and evolve in the future, further enhancing the broker industry.

Economic headwinds

Amid these changes, mortgage holders face economic uncertainties, including high inflation, another potential rate hikes and cost-of-living pressures.

As the RBA seeks to control inflation, bringing it back to the 2–3 per cent range, the market closely watches quarterly Consumer Price Index (CPI) data out today (25 October).

Mr Young, along with other economists, expects inflation will show a slight increase on the back of rising petrol and energy prices.

Alongside high interest rates and inflation, lending indicators have shown a recent uptick in activity; this optimism contrasts with the RBA’s desire for economic easing.

According to the latest lending indicator data from the ABS, new loan commitments lifted 2.2 per cent in August, which comes off the back of a 9.4 per cent decline over the year.

As such, the risk of another rate hike is possible, Mr Young said.

“If we do get another interest rate rise that’s going to flow through to those people who are very highly geared at the moment,” Mr Young said.

“I suspect the Australian economy can hang around and survive through.”

Rising interest rates may pose challenges for highly leveraged borrowers, but the Australian economy is expected to persist, he said.

However, he warned the business lending space will continue to be challenged.

Traditionally, small businesses rely on holiday season sales and poor performance during this time can lead to financial difficulties in January and February, he said.

This could potentially result in an unusual uptick in bankruptcies, adding to the economic landscape.

Indeed, CreditorWatch has already warned that the national business failure rate has increased sharply over September.

The data noted the national probability of business failure over the next 12 months has risen from 4.54 per cent to 5.76 per cent.

Given the economic times and the continued growth in refinances, Mr Young recommended brokers kept “close” to their back books rather than focus on new clients.

[Related: Sharp rise in business failures expected: Creditorwatch]