A period of ultra-low longer-term fixed rate mortgages is coming to an end, according to economists, following a 50 per cent jump in the portion of fixed-rate housing credit over the past year.
But the Reserve Bank of Australia expects short-term fixed and variable rates to remain at historic lows until inflation falls within the central bank’s 2 per cent 3 per cent target band, which is “unlikely” to occur until 2024.
The portion of fixed-interest mortgages increased by more than 50 per cent over the past 12 months according to the RBA.
The portion of fixed-rate residential lending increased by half following the RBA’s monetary policy easing at the beginning of the pandemic.
However, with the three-year horizon now taking in 2024, when the cash rate is expected to lift and the RBA’s three-year fixed term-funding facility (TFF) expiring later this month, this credit shift is expected to slow. Many analysts believe the cash rate will lift much earlier than the RBA forecast.
Fixed-rate mortgages below two per cent over four and five years have disappeared, according to Jarden chief economist Carlos Cacho. Jarden forecasts a 25-50 basis point hike on three-year products within months.
“The time of ultra-low fixed rates is coming to an end, with the last of four and five year fixed rates below 2 per cent gone, and the completion of the TFF likely to see sub-2 per cent three year rates disappear in coming months,” Mr Cacho said.
Accommodative monetary policy including the funding facility, yield curve control and forward guidance slashed bank borrowing costs over the past year, which flowed through to low fixed-interest products.
Fixed rate mortgages made up about 30 per cent of outstanding housing credit in May, up from just below 20 per cent in March 2020, with fixed periods longer than two years recording the strongest growth.
“Fixed housing rates have declined by more than variable rates since the start of the pandemic in response to the bank’s policy measures – so much so that there’s been a noticeable increase in the share of new household loans at fixed rates,” RBA assistant governor Christopher Kent said in a speech in Sydney on Wednesday.
With rates at record lows and unlikely to decline further, households were more confident to lock-in longer-term fixed loans in the knowledge they were unlikely to miss out on future falls in variable rates.
“The volume of loans fixed for 3-4 years has grown rapidly, albeit from a low base. As a result, a number of Australian households have locked in low rates on their mortgages for some years,” Dr Kent said.
A significant driver of this shift, combined with a jump in bank deposits, was the term funding facility, which provided banks with low cost fixed-rate funding between 0.1 per cent and 0.25 per cent for 3 years.
According to the central bank, to date lenders have drawn down about $145 billion under the scheme and are expected to draw down the remaining $64 billion by the end of the financial year.
“In short, the availability of the TFF, along with the large increase in low cost deposits, have combined to reduce banks’ cost of funds to historic lows,” Dr Kent said, citing a significant decrease in bank’s issuing senior offshore debt.
But with the TFF expiring on June 30, and the three-year swap rate lifting over the first few months of the year, fixed-rates are expected to rise to reflect increases in borrowing costs.
Westpac this month hiked its two- and three-year fixed rates by 10 basis points and the change is to be rolled out across its regional banking brands St George, BankSA, Bank of Melbourne and RAMS.
Dr Kent said he did not expect a rise in the swap rate around the three-year mark to have a significant effect on banks’ outstanding funding costs.
“There’s been a bit of an increase in some new fixed rates, but the effect of this on broader financial conditions is minimal, and shorter-term rates, including for variable-rate loans which constitute the bulk of credit, will remain low for as long as it takes to achieve the bank’s inflation goals,” he said.
Accommodative monetary settings for lending coincided with a boom in house prices (up 12.6 per cent over eight months) and the strongest house price recovery on record, according to Jarden.
Borrower-accepted loan commitments for housing hit a record $31 billion in April this year, up 3.7 per cent over the month and 68.2 per cent over the year; and well above pre-pandemic levels below $20 billion.
Commitments for owner-occupier housing also hit a record high, up 4.3 per cent to $23.0 billion, while investor loans increased 2.1 per cent to $8.1 billion, the highest level since mid-2017, according to the ABS.
(Fin Review – June 2021)
If you would like assistance with purchasing property or refinancing, or to discuss any other lending needs, please do not hesitate to contact Geoff.
PROSPERA FINANCE — Geoff Norman
MOBILE LENDER PROVIDING MORTGAGE BROKERING SERVICES TO NORTH SYDNEY | CROWS NEST | ST LEONARDS | GLADESVILLE — FINANCING HOME LOANS — FIRST HOME BUYER LOANS — CAR LOANS — LOW DOCUMENTATION LOANS — EQUIPMENT LEASE
