How did Australian banking change in 2020?

The coronavirus pandemic and resulting economic crisis have forced business to re-examine, if not completely overhaul the way they operate, and few sectors have pivoted as emphatically as the banking sector.

Today, the Australian banking world looks a lot different than it did a year ago. From mortgage deferrals to new payment methods, rock-bottom interest rates to stricter credit controls, we look at some of the ways banks have adapted in 2020.

Banks became the nation’s shock absorbers

Amid fears that the pandemic could bring the economy to a standstill, banks, regulators and the government formed a united front, working together to make sure households and businesses got the support they needed to make it through the crisis.

Banks in particular took on the role of shock absorbers. Back in March, they offered to pause repayments, made significant cuts to fixed mortgage rates and business loans, boosted select term deposit rates and scrapped a number of fees.

Mortgage rates dropped to all-time lows

The Reserve Bank of Australia cut the cash rate three times this year: twice in March at the onset of the pandemic and once in November. On the last two occasions, most banks decided against cutting variable rates and made substantial cuts to fixed rates instead.

Variable rates tend to move in line with the cash rate, so the decision to withhold relief to variable rate customers was a sore point for many. Nonetheless, both fixed and variable rates are currently at the lowest levels they’ve ever been.

Among lenders we track, the average 2-year fixed rate sits at 2.48% p.a. — 147 basis points lower than it was back in January 2019. The average variable rate is a bit higher at 3.34% p.a., which is 101 basis points lower than it was early last year.

Saving accounts almost hit zero

While a low interest rate environment is good news for mortgage holders, it’s less likely to be appreciated by savers. Since October 2019, the average ongoing savings rate has fallen from 1.12% p.a. to 0.54% p.a. — and it looks like it’ll only drop further.

Right now, banks don’t have much interest in attracting depositors, given all the RBA is doing to keep funding costs low. They’re also mindful that customers can withdraw their money at any time, so retail deposits aren’t rated too highly compared to other, less volatile sources of liquidity.

The sole exception nowadays is Westpac’s Life account, which offers a maximum rate of 3.00% p.a. on balances up to $30,000 (so long as a few monthly conditions are met). However, it’s only available to those aged 18-29, so anyone older will have to look elsewhere.

It got harder (for some) to get a home loan

Once the reality of the pandemic set in, banks and lenders made a whole lot of changes to how they do business. While lending certainly didn’t stop, banks were much more mindful about issuing loans to financially vulnerable people.

This took a number of forms: borrowers from hard-hit industries were flagged as high risk, debt-to-income thresholds on loans were reduced, employment checks were conducted all the way up until settlement and non-base income types (like overtime pay) were discounted by as much as 50%.

But credit controls like these won’t remain in place for too long. In fact, the government is eager to get rid of some of the red tape banks face when assessing mortgage applicants. 

As of next year, ASIC’s role in enforcing responsible lending obligations will be reduced, and banks will be encouraged to take credit applicants at their word when they provide income and spending information, rather than relying on their own verification methods.

Big banks took on buy now, pay later

In recent years, younger shoppers have turned their backs on traditional credit products and flocked to buy now, pay later services in droves. To reel them back in, two major banks introduced their own interest-free payment options this year. 

NAB launched its StraightUp credit card in September and CBA hastily announced its CommBank Neo card a day later. Neither charge interest, late fees or foreign currency fees — just a fixed monthly fee depending on how high your credit limit is.

Lenders looked beyond pricing to attract customers

Lenders aren’t just counting on low interest rates to entice quality borrowers nowadays. With so much competition in the home loan space, plenty have realised that sometimes you need a little extra to sweeten the deal.

Some, like St. George and Virgin Money, offered to cover lenders mortgage insurance (LMI) for first home buyers with a deposit of at least 15%. LMI can cost thousands of dollars, so letting borrowers hold onto that money can make the road to home ownership that much easier. 

We also saw a surge in popularity of cashback deals, which are one-off sums paid out to eligible refinancers or new borrowers. These are usually between $1,000 and $4,000, and can be used for any purpose, including paying off your mortgage.

Low LVR borrowers became much more attractive

This year, banks and lenders have had to reevaluate their appetite for risk in the face of so much uncertainty. In a bid to attract low-risk borrowers, some are now offering more attractive rates to those with lower LVRs.

Neobank 86 400 began offering tiered variable rates based on the size of deposit. And online lender Athena took things one step further with a new pricing model which automatically rewards borrowers with lower rates as they pay down their loan.

Dubbed AcceleRates, it offers three price bands for LVRs of <80%, <70% and <60%. As borrowers progress to each tier, the interest rate will automatically drop, making it the first dynamic pricing model of its kind in Australia.

For more insights about mortgage and lending trends, visit our home loan statistics page. And if you’re looking to enter the market yourself, make our home loan comparison page your first stop.