Mortgage market's changing dynamics

The mortgage market made solid gains last year and looks set to maintain its momentum in 2015. However, lenders should not assume that it is business as usual; there were some important changes in the composition of the market over the past year.

These included the rise in demand from investors, the fall in first-home buyer activity and the increasing willingness of lenders to make out of cycle changes to variable rates.

According to the latest Reserve Bank figures, lenders' mortgage balances were up 7.1 per cent over the 12 months to November - the highest annual growth rate since January 2011. Lending to owner-occupiers was up 5.7 per cent over the 12 months and lending to investors was up ten per cent.

The gap between growth in lending to owner-occupiers and lending to investors is at its widest point in almost a decade. Lending to investors accounts for 43.2 per cent of total outstanding mortgage balances.

Mortgage aggregator AFG said that property investors accounted for 39.4 per cent of its home loan sales in December. Investors made up 38 per cent to 40 per cent of AFG sales throughout the year.

First-home buyers made up 6.9 per cent of AFG's sales in December. A year earlier the level was 10.2 per cent.

AFG says 14.5 per cent of borrowers chose fixed rate loans in December, which was the lowest level in two years.

Broker group Mortgage Choice said fixed rate loans accounted for 22.3 per cent of mortgages written by Mortgage Choice brokers in December - its lowest level in 22 months.

Australian Prudential Regulation Authority figures show that during the September quarter 12.1 per cent of new housing loan approvals were for loans with loan-to-valuation ratios of 90 per cent or more - down from 13.5 per cent in the December quarter 2013. In the September quarter 42.5 per cent were interest-only loans, compared with 39.4 per cent in the December quarter 2013.

Market share remained fairly stable during the year. According to APRA, among the big banks Commonwealth Bank and Westpac lost a little share during the year, while ANZ and NAB gained share. CBA's share slipped from 27.3 per cent to 27.1 per cent over the 12 months to November and Westpac's share fell from 25.2 per cent to 25.1 per cent.

ANZ's share rose from 15.1 per cent to 15.2 per cent and NAB's share rose from 16.6 per cent to 16.8 per cent.

Among other lenders, Bendigo and Adelaide Bank and Macquarie Bank gained market share, Bank of Queensland and Suncorp lost share and Citibank, HSBC, ME Bank were steady.

A number of lenders specialising in the low-doc and non-prime segments of the market raised funds in the mortgage securitisation market last year. These included Liberty Financial, Bluestone, Pepper and RedZed. However, the APRA figures indicate that these lenders have only made a small impact on the market so far; 0.7 per cent of new housing loan approvals in the September quarter were low-doc loans, compared with 0.5 per cent in the December quarter 2013.

On the interest rate front, the average three-year fixed rate was cut by 22 basis points over the course of the year, the average two-year rate fell by around ten basis points, while the average five-year rate fell by more than 60 basis points.

The decoupling of variable rate pricing from the cash rate became an entrenched practice during the year, with a large number of lenders adjusting variable rates on package offers, for certain loans depending on LVR limits and as special offers.