Daily Commentary BY THE CURVE TEAM –

Rate Cuts Spur New Lending

17th of November, 2020

The RBA’s three rate cuts last year continue to support new lending growth.

New lending commitments continue to rise at a solid clip, following the three rate cuts from the RBA last year. New lending commitments in November of owner occupiers and investors both rose, with first home owners still entering the market.

Investors led the charge in November. New commitments to this sector are still lower than a year ago. Over the past year, new owner occupier commitments are up 10%, while new lending to first home owners is up nearly 20%.

With all these new commitments, usually banks would line up to source more funding in order to meet this spike in new lending. However, the downside of lower rates is that existing borrowers are paying off their loans much quicker.

Rather than spend the windfall from lower mortgage payments, homeowners are opting to leave their mortgage payments at higher levels in order to pay down their debt faster. As a result, the growth in the outstanding level of debt in Australia continues to slow, as seen in the RBA’s aggregates.

Therefore, a lot of this new lending is being financed by the increase in prepayments from exisiting borrowers. This means that despite the spike in new lending, we are yet to see an increase in banks appetite for new funding. As a result, deposit margins remain lower than in recent years.

If we see further rate cuts as the market is expecting, these trends are likely to continue.

David Flanagan

Director - Interest Rate Markets