Super-sized rate hikes shrink loan sizes, increase LVRs

The impacts of rate hikes are starting to manifest in the mortgage lending activity, with loan sizes declining and loan-to-value ratios (LVRs) rising.

According to Australian Finance Group (AFG) Mortgage Index, home loan lodgements declined 4% over the first quarter of FY 2023 to $21.5bn — Western Australia recorded the biggest decline at 5.62%, followed by New South Wales 5.13%.

AFG CEO David Bailey said the interest rate levers being pulled by the Reserve Bank of Australia are starting to impact several facets of the mortgage lending market.

“Australian mortgage customers have been hit between the eyes over the past six months with interest rate hikes being super-sized to slow the level of activity in the market,” he said.

“With interest rate rises still being absorbed we would argue there is a need for a ‘wait and see’ approach by the RBA as the impact starts to flow through.”

Due to rising rates, loan sizes have declined. On a national level, the average loan size decreased by $15,000 to $596,000, the lowest since the final quarter of 2021.

New South Wales reported the most significant decline in loan size at $33,000 while South Australia went against the trend and recorded a $2,000 increase.

LVRs also increased, albeit only slightly to 65.6%.

The AFG Mortgage Index also showed that the four major banks and their associated brands were able to increase their market share over the quarter, now at 60.77%.

ANZ saw a substantial lift from 10.9% to 14.82% while CommBank and its affiliate Bankwest witnessed an increase from 18.12% to 20.33%.

“The importance of a competitive lending market cannot be underestimated in driving affordability,” Mr Bailey said.

Non-major lenders have slipped back to their lowest level of market share since the final quarter of 2020 at 39.23%.

“The broker channel, now responsible for 68% of the market, is vital to ensure the non-majors can continue to compete,” Mr Bailey said.

Brokers’ biggest concern

An analysis by the Finance Brokers Association of Australia (FBAA) showed that the biggest concern of brokers across the country are the capacity of individuals who have recently been through a marriage or relationship breakdown to take out a new loan or refinance.

FBAA managing director Peter White said most brokers blame a lack of compassion from lenders, whose credit assessments are “grossly unfair” to recently divorced or separated individuals.

“It’s always been a more difficult path for people in this situation, but in the past it has been easier for them to buy out a property that was owned jointly, or refinance to start a new life,” Mr White said.

“But now banks are simply rejecting applications outright, due solely to financial problems around the relationship breakdown, and despite an applicant having an excellent credit history to that point.”

Mr White said lenders must have the capacity to assess every client individually and take into consideration any circumstances that would affect one’s finances.

“Relationship breakdowns are messy — sometimes one partner makes decisions that affect the other, or the stress of the situation causes medical issues, or legal and relocation costs put financial pressure on a couple and repayments fall behind.”

“Banks can easily extend some compassion instead of being pig-headed and applying an overarching and inflexible policy for everyone.”

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