Banks talk of withholding RBA cuts while fixed-rate mortgage demand falls

Demand for fixed-rate mortgages appears to have peaked, with Mortgage Choice recording a drop in the proportion of these loans written in January, the first decline since May 2011.

Mortgage Choice customer data shows fixed-rate products accounted for 21% of all new home loan approvals in January 2012, a fall from 24% in December 2011.

The mortgage broking franchise expects fixed-rate demand to fall further in February, should lenders pass on all or some of an RBA rate cut next week.

The likelihood of banks passing on a full RBA rate cut appears to be growing more remote by the day, with the Australian Bankers Association today putting out a statement attempting to explain how banks source their funding and highlighting that more than 20% of their funds comes from overseas.

“Australia’s banks have to raise an important proportion of their funding from overseas,” says Steven Münchenberg, chief executive of the ABA.

“The deep crisis in Europe means the cost of borrowing money in those international markets has risen to levels last seen during the global financial crisis… Because overseas prices are so high, there is greater demand for funds from depositors and investors in Australia.  This has driven up the price of this money as well.

“While the RBA has been cutting rates, banks have continued to pay high interest rates to depositors, benefitting Australian savers, but adding to the cost of bank funding,” he says.

The number of lenders cutting fixed rates has fallen sharply, with Westpac brands St George and Bank of Melbourne the last big lenders to trim fixed rates, doing so just before Christmas.

Despite the drop, demand for fixed-rate mortgage still stands well above both the six-month average of 19% and the 12-month average of 16%.

Demand for ongoing discount variable-rate mortgages (where the rate is discounted over the life of the loan in exchange for higher fees) jumped from 41% to 46% in January, an all-time Mortgage Choice high.

“Our latest loan approval figures suggest borrowers taking out new loans at the start of this year were less concerned with locking in their loan’s interest rate than those who took out a new loan in late 2011,” says Mortgage Choice spokeswoman Belinda Williamson. 

“Interest rate cuts and generous discounting on variable rate loans could be the key drivers behind borrowers giving fixed rate loans the cold shoulder. The margin between fixed and variable has narrowed, with most variable rates now sitting only slightly higher than fixed rates,” she adds. 

According to Williamson, if the RBA cuts rates on February 7 and lenders pass on most of this rate cut, “some variable rates could very well fall below fixed rates”. 

“If this occurs, next month’s loan approval data may show a bigger shift towards variable rate loans.” 

Demand for basic variable loans fall slightly to 14% of all approvals in January, from 15% in December while standard variable loan demand dropped marginally to 15% from 16%. 

Line-of-credit loan popularity held steady at 3% and interest in introductory rate loans remained below 1%.