A new report released by Macquarie showed that major banks’ returns from new mortgages are less than half their existing back book of customers, hence painting a grim outlook for lenders despite record low interest rates.

In an effort to keep up with competition, banks are giving discounts for new mortgage customers at about 140 basis points, pushing home loans to about four per cent for owner-occupiers and 4.27 per cent for investors.

These findings by Macquarie are in line with data from Canstar, which shows that first time new borrowers who live in their property and have some equity can get home loans below four per cent across variable and fixed-rate products out to five years.

“This suggests that the blended return across the portfolio is now about 14 per cent versus 30 per cent returns across their back books,” said Macquarie banking analyst Victor German. “These pricing trends do not bode well for banks’ future returns. Banks will need to compete less aggressively or put more emphasis on cost management in order to preserve future profitability.”

Both Bendigo Bank and Bank of Queensland are generating returns from new mortgages 60 per cent below their back books. German said that these banks’ valuations could fall 13 per cent, even after they reprice their mortgages in their favour.

“Given mortgages represent 25 per cent of the majors’ and 45 per cent of the regionals’ capital bases, the impact on group returns from lower profitability on mortgages is material,” he said.

Macquarie expects the mortgage growth of the Big Four to slow at 4.5 per cent next year.