Banks are rushing at the last minute to spend the $ 200 billion in emergency money the RBA made available to them during the crisis that will drive fixed rate mortgages up.
But you might still be better off in a fixed rate loan despite such increases as they are significantly cheaper than the average variable rate loan.
âFixed rate loans have been the battleground lately and they will remain attractive even after small increases like the ones seen recently,â said Steve Mickenbecker, director of the Canstar research group.
Just three weeks ago, $ 100 billion of the $ 200 billion made available to banks under the Term Finance Facility (TFF) remained unspent.
But RBA Deputy Governor Christopher Kent said in a speech Wednesday that only $ 64 billion was left and “we expect most of the available funds will be used” in the window remaining until its June 30 expiration date.
You have to move
This means that if you are considering a bargain priced fixed rate mortgage, now is the time to act. The reason is simple.
The TFF grants the bank three-year loans at the lowest rate of 0.1% that it can on-lend to homebuyers at a lower cost than if they had to borrow it on the open market.
As the chart above shows, the TFF money that banks borrow will need to be replaced with other sources of funding, such as offshore loans, for which they can expect to pay at least 0.5%. .
Banks are already repositioning themselves for this reality.
In recent weeks, “the CBA and Westpac have increased their two- and three-year fixed lending rates,” Mickenbecker said.
And while ANZ and NAB have yet to follow, IBG, AMP and seven other small lenders have.
The ABC raised rates by 0.05%, or five basis points, bringing three-year fixed rate loans to 2.19% and four-year loans to 2.25%.
Westpac rose 0.1%, resetting two-year rates to 1.99% and its three-year loan to about the same level.
It’s the environment
Besides TFF, other factors are contributing to the rise in fixed rate loans.
“This in part reflects the TFF, but more generally it reflects the reality that as we move forward through time we are getting closer to when the RBA will start to tighten its policy,” said Sarah Hunter, economist in chief at BIS Oxford Economics.
The RBA has said it plans to raise rates from 2024.
“Even the two-year rate is starting to increase, which tells you that in two years or so the financial markets are expecting the RBA to start raising the cash rate,” Dr. Hunter said.
There will be other moves in the fixed rate mortgage market, but those moves won’t be too dramatic, Mickenbecker said.
âIt’s still a very favorable funding environment for banks, even without TFF,â he said.
“I don’t think you can say that the 10 basis point changes in fixed rates are totally the result of the upcoming end of TFF – that’s only part of the mix – maybe a few points basic.”
Low is still low
So while all banks are likely to move fixed rate lending to levels similar to the 10 basis points of ANZ and NAB “I don’t think we will see fixed rates go above that for a while. “said Mickenbecker.
Therefore, fear of missing out should not be the primary driver.
“If it goes up 10 basis points and you lock in rates 10 basis points above some of the lowest interest rates we’ve had in a long, long time, you’re still getting a pretty good rate. interesting, âMickenbecker said.
“I don’t think you need to panic.”
Fixed rate hikes are unlikely to impact short- and medium-term flexible rate loans as they are funded from different sources, Dr Hunter said.
“The liquidation of TFF is not expected to have an impact on variable rates as they are driven by very short term rates and the RBA has said it will not increase the cash rate anytime soon,” a- she declared.
“Standard variable rates are funded by the 90-day banknote swap rate, so these rates are only expected in three months.”
So even though variable rates are expected to stay at current levels, at first glance they are still less attractive than fixed rate loans.
âThere are a few things to consider with fixed rate loans,â Mickenbecker said.
âWhen the loan term expires, many banks will give you their standard variable rate, which is higher than other offers you might get. So you don’t want to be lazy when the loan ends or you might end up paying more.
âYou have to make a choice as to the length of your stay. If you go for a shorter period, you may want to stay longer when you switch to a higher rate variable loan.
And remember, although non-banks only hold about 5% of the mortgage market, they may give you the best deal because they don’t have all of the expensive infrastructure like the big banks do.
The Canstar chart above shows that non-banks can give you a variable mortgage rate with a 2 in front of it while with larger banks it’s a 3.