Switching lenders reaches record

RBNZ data shows 28.8% of homeowners holding $9 billion in mortgages switched lenders in July.

That is a record for the central bank’s new residential mortgage lending by purpose data series, beating the previous record of $2.457 billion set in June. 

Over the year to July, the number of new mortgages taken for a change in lender rose by 41.8% and increased 7.6% from June.

Mortgage advisers Kris Pedersen and Campbell Hastie are not surprised at the surge in lender switching.

“It’s all to do with cashbacks,” they say.

For 99% of clients looking at switching lenders, it entirely boils down to cashbacks because there isn’t really any difference in the interest rates offered by the main banks.

And a bank not offering a cashback to an existing customer is often interpreted as a signal it doesn’t care, pushing client loyalty out the door.

“In the past year as interest rates have dropped substantially a lot more mortgage holders have qualified to move lenders and they have become more aware of cashbacks,” Pedersen and Hastie say.

Although there have been different variations on the theme for the past 15 years – overseas holidays and TVs as incentives earlier on – Pedersen says clients weren’t necessarily aware of them.

In the past one or two years it has become a more prominent incentive for mortgage holders to switch lenders. 

“Now when clients are outside the period they need to stay with a bank that has given them a cashback, they will ask their adviser to see what else is on offer,” he says.

Hastie says there are a lot more clients than ever before asking about cashbacks, but for some it doesn’t make any sense. It has to stack up financially.

He says while a $4,000 cashback offer from a rival bank will make a difference to a client’s attitude to switching lenders, they have to be mindful of what it takes to get the offer.

“The possibility of legal fees will substantially erode the amount of cash they will get in their pocket.”

“If lawyer’s costs are going to eat up $3,000 of the $4,000 cashback, why bother?”

Mortgage cashback offers to new clients are the driving force behind bank competition. Bank profitability is mainly volume in market share. Even if that share moves by just 0.5%, it can add an enormous amount to a bank’s bottom line.

To an extent banks are falling over themselves to get new clients, Hastie says. Most are paying between 0.8-0.9% as a cashback to a new customer – somewhere between $8,000-9,000 for every $1 million borrowed. That is pretty decent.”

However, for mortgage holders who have a loan under $300,000 switching lenders to get a cashback is probably not worth it, he says.

Hastie says the size of the cashback isn’t the important piece. “It is what a client is left with after switching lenders and the effort required to actually move.

“For some customers making a new mortgage application to another bank is just too big of an ask. When we put the list of items in front them that are needed for an application, some of them go, ‘I'll just take the money that my existing bank's giving me, even though it's not as much as I'd like’.

“If a client doesn’t meet the criteria of another bank, it doesn’t matter how much cash has been waved in front of them they can’t get it. 

Offers from banks to existing clients are always less than offers from rival banks, as they take off the legal fees. For example, a client’s existing bank might offer $3,000, while an offer from a rival bank might be $5,000.

Pedersen says the surge in mortgage holders switching lenders probably comes down to more loans being written by mortgage advisers, bank/client relationships falling by the wayside, the financial benefit of considering different lenders and the increasing ease of being able to switch all banking.

There is more to switching lenders than cashback offers, he says. “For some clients they will be moving away from other benefits their bank offers and for others it is loyalty to their existing lender,” he says. 

Pedersen, who deals mainly with property investors, says for example ANZ will lend on a 38m2 apartment and others won’t, so it would be pointless trying to move that security to another bank.

“Some banks are better at lending on multi-unit properties than others, so we are not going to try and move that lending because of a cashback offer as it might have a detrimental effect on what the client does or wants to do down the line.”

There are also other considerations, such as interest only, which is different from bank to bank. “A lot of different factors come into play for investors, but for a home owner with a chunky mortgage who can get a quick $8,000 or more by switching lenders you can see why they are doing it.”