Small banks start to take back market share from big four

After bettering their smaller peers in owner-occupied mortgage interest rates amid COVID-19 in April, new research shows big banks’ interest rates are now higher on average than non-big four lenders.

Big banks’ rates were on average 0.08 per cent higher than the rest of the market across this period, according to the latest report from online broking platform Lendi.

But overall, banks passing on RBA rate cuts at the start of the year means the median interest rate across the market came down by 0.35 per cent for loans settled in the first half of 2020.

Although borrowers preferred big four banks in May and June, other lenders are now taking some of this market share back, especially among people refinancing loans.

Lendi’s figures suggest during the first six months of 2020, refinancers were able to slash 0.96 per cent from their interest rate. This equates to an annual saving of $2295 on a $407,000 loan.

Wealthful founder and mortgage broker Chris Bates has seen smaller banks and non-bank lenders become more popular with borrowers. “Our business sends more than 70 per cent of loans to non-big four banks.”

Conversely, Southshore Finance director Michael Coombes says, in his experience, borrowers tend to stick with the majors in times of uncertainty, even if that means a fractionally higher rate.

“Brokers and borrowers who have been around for a number of years remember the pain the non-majors caused borrowers during the GFC. The non-majors tend to have smaller balance sheets and less secure funding sources than the majors. During the GFC we saw the non-majors withdraw approvals prior to settlement and jack up interest rates. While regulatory changes since have reduced the risk of this type of behaviour, the potential still exists.”

Coombes says there’s not much demand for refinancing to a new lender at the moment. “In most cases the incumbent lender will offer discounts or switch products to retain a good customer. We are seeing borrowers refinance as part of a new property purchase or for significant events such as renovations.”

Whichever avenue borrowers choose, Lendi co-founder and chief executive David Hyman encourages borrowers to regularly negotiate with their lender.

“Do your research and understand your position. Know what your lender and other lenders are offering new customers with a similar debt size and loan-to-value ratio. Then ring your bank and ask if it will match what it offers new customers who are similar to you, based on your repayment type, LVR and outstanding loan amount.”

Hyman says while banks have been proactive offering relief measures such as repayment deferrals to those severely affected by COVID-19, banks need to reduce barriers to switching lenders so borrowers can access cheaper rates.

Overall, Hyman says until the economy recovers and achieves some stability, expect reduced risk appetites from banks. “For borrowers, this will play out in the form of more stringent assessments of loan applications, particularly when it comes to proof of income security and expenses.”