RBA’s Christopher Kent says fixed rate borrowing has exploded, but is starting to rise
“The era of ultra-low fixed rates is coming to an end, with the last four- and five-year fixed rates below 2% gone, and TFF completion is set to see three-year rates below 2% disappear.” in the coming months, âCacho said.
The accommodative monetary policy, including the ease of financing, control of the yield curve and forward guidance, have reduced bank borrowing costs over the past year, which has trickled down to low-rate products. of fixed interest.
Fixed-rate mortgages accounted for around 30% of outstanding home loans in May, up from just under 20% in March 2020, with fixed periods greater than two years seeing the strongest growth.
âFixed real estate rates have fallen more than variable rates since the start of the pandemic in response to the bank’s policy actions – so much so that there has been a noticeable increase in the share of new fixed-rate household loans. RBA Deputy Governor Christopher said. Kent said Wednesday in a speech in Sydney.
With rates at record highs and unlikely to fall further, households were more confident to lock in longer-term fixed loans, knowing they would likely not miss future variable rate cuts.
âThe 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 a few years, âDr Kent said.
An important driver of this change, combined with an increase in bank deposits, was the term finance facility, which provided banks with low-cost fixed rate financing of between 0.1% and 0.25% for 3 years.
According to the central bank, to date lenders have drawn around $ 145 billion under the program and are expected to withdraw the remaining $ 64 billion by the end of the fiscal year.
“In short, the availability of TFF, along with the sharp increase in low-cost deposits, have combined to lower the cost of banks’ funds to historically low levels,” said Dr Kent, citing a significant decrease in senior offshore debt issuance of the bank.
But with the TFF expiring on June 30 and three-year swap rates rising in the first few months of the year, fixed rates are expected to rise to reflect rising borrowing costs.
Westpac this month raised its two- and three-year fixed rates by 10 basis points and the change is to be applied to its regional banking brands St George, BankSA, Bank of Melbourne and RAMS.
Dr Kent said he didn’t expect an increase in the swap rate to around the three-year mark to have a significant effect on the banks’ ongoing funding costs.
âThere has been a slight increase in some new fixed rates, but the effect on broader financial conditions is minimal, and shorter-term rates, including for variable rate loans which make up the bulk of credit. , will remain low for as long as it takes to meet the bank’s inflation targets, âhe said.
The easy monetary parameters for loans coincided with a surge in house prices (up 12.6% year-over-year) and the biggest recovery in house prices on record, according to Jarden.
Loan commitments accepted by borrowers for housing hit a record $ 31 billion in April this year, up 3.7% on the month and 68.2% on the year; and well above pre-pandemic levels below $ 20 billion.
Liabilities for owner-occupied housing also hit an all-time high, up 4.3% to $ 23.0 billion, while investor loans rose 2.1% to $ 8.1 billion , the highest level since mid-2017, according to ABS.