July 27, 2020 by Dymphna

Why new borrowers are getting shafted

Bottlenecks are putting a break on new lending…

There was some interesting analysis from Richard Wakelin in the AFR last week.

Basically, he reckons that banks are dragging the chain on lending to new buyers, and that the huge demand for refinancing has created a bottleneck in the lending market.

The policy and regulatory response to the COVID-19 pandemic appears to have created unnecessary bottlenecks in new mortgage processing times.

Absent timely finance approval, prospective buyers are struggling to transact, a situation that risks seizing up a vital source for economic recovery.

… Back in March, the Reserve Bank of Australia initiated a slew of aggressive responses to the pandemic. It slashed the cash rate, provided explicit forward guidance that rates were staying low for the foreseeable future and bought government bonds in the debt market.

These actions reduced retail bank funding costs significantly, by lowering and flattening the yield curve. And, like night follows day, mortgage rates were cut.

This should have been unalloyed great news for buyers and perhaps the Reserve Bank thought so too. But, perplexingly, residential property professionals have been finding that clients can’t obtain finance despite seemingly presenting as good credit risks.

Recent lending data add to misgivings that this is a systemic and widespread problem.

The latest ABS lending data show a phenomenal surge in mortgage refinancing applications since April, while borrow-to-buy applications have fallen.

And although some of the fall in new transaction borrowing relates to softer demand, I believe finite banking resources have been diverted away from those borrowers who want to buy and hence have generated a backlog in new business processing times.

Mortgage rates have dropped significantly, and with the RBA crushing the long end of the yield curve, fixed rate mortgages have tanked.

Not surprisingly, borrowers are keen to refinance. And given how easy it is to shop around these days, that’s leading to a lot of churn in the mortgage market.

So you can imagine this from a bank’s perspective.

You can either lend to someone who already has a house, has perhaps had a house for a long time, and has a long history of making their repayments on time.

The risk? Almost nothing.

Alternatively, they can lend to a new buyer with an uncertain repayment record, on a property with an uncertain valuation.

The risks? Definitely higher.

So it’s not surprising that banks are prioritising refinancing right now – especially as they start to ask questions about the ongoing quality of their loan book.

New buyers then end up at the back of the cue, regardless of their credit risk.

This is an unfortunate situation, but it perhaps highlights some latent potential in the market.

Demand is definitely softer than it was pre-Covid. There’s no doubt about that.

But it’s perhaps not as weak as the lending data or the transaction data might suggest.

And that creates the potential for some upside surprise on the other side of Covid.

But sooner or later the refinancing boom will have to work its way through the system, and that should open the door for new borrowers.

I can’t imagine that’s too far away.