More mortgage borrowers are switching banks but borrowers seem to have reached their home loan obligation limit as rates and payments rise. High LVR borrowers have the fewest choices

New data from the Reserve Bank (C33) reveals the average size of mortgages being granted and the level of switching that customers do between banks.

The release of the number of loans involved is the new bit, enabling us to track the average borrowing, not only for all borrowers, but for high LVR (loan to value ratio) borrowers as well.

And in turn that reveals borrowers have been reducing their obligations to banks. They topped out at an average of $637,300 per loan in January 2022. But in the 20 months since, this average has fallen to $551,100. That is more than a 13% fall in just 20 months.

After a long period of increases, since this data series began in 2017 but probably well before that, borrowers are restraining their appetite for taking on larger housing loan obligations. Perhaps they reached the limit of their financial capability, and were looking forward to much higher rates and therefore higher repayment obligations, with concern. They have certainly acted like that.

High LVR borrowers are more aggressive with how much they borrowed; presumably many of these are first home buyers who are stretching to get into home ownership. But they too have plateaued and also seem to have limits..

And the data allows us to look at another interesting group - those who changed banks. These people have higher loans ...

... but the much smaller group with high LVR loans that change banks do really have very much higher loans. At August, their loans averaged $750,000 each for the 20 borrowers involved.

Switching banks is gradually becoming more popular

Among all borrowers, the frequency of changing banks is rising.

One in eight property purchase borrowers do so with a different bank than the last time. On average, every month 1830 of these borrowers have responded to the offer of a different bank. That is a lot of business chased to a successful switch; $3.8 billion per month.

But banks have never really chased high LVR borrowers. Until the onset of the pandemic there was a minor amount of this activity - the most for any month was for just 65 loans nationwide. But the pandemic saw the end of that activity and there were two months where no bank took on a switching client who had a high LVR loan. Now the pandemic period has ended, and interest rates are rising, this corner of the mortgage market has hardly recovered. In August there were only 20 of these loans switching.

There are lots of disadvantages for being a high LVR borrower, including suffering 'standard' interest rates, often enduring low equity premiums, not to mention extra scrutiny of your finances. Once you clear those hurdles, it seems either borrowers are too gun-shy to try and change banks, or alternative banks are wary about the real motivations you may have for wanting to switch at that point.

On the other hand, there are lots of very good financial reasons for wanting to pay down a home loan as quickly as you can afford. Just know it is rare and potentially rough waters if you are thinking of changing banks when you have a high loan to value ratio.

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