The bond market calls the time on the fixed rate home loan

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Ms Tindall noted that 151 fixed-rate loans, most of them short-term under two years, remained below 2%.

The increase in fixed rate mortgages has been directly linked to movements in bond markets as banks use market rates to borrow money which they can then lend to borrowers, thus ensuring a profit margin. for this duration.

But these market yields, which mirror the expected path of policy rates, have skyrocketed amid global fears that higher-than-expected inflation will force central banks to raise interest rates more aggressively earlier than they do. hadn’t foreseen it.

Summits in two years

Last week’s massive sales were sparked by New Zealand inflation data, which showed prices had risen at their fastest pace in a decade.

The three-year Australian bond rate fell from 0.6 cent to 0.75% to 1.1%. This key rate has more than tripled in one month. Meanwhile, market prices have shifted the timing of the Reserve Bank’s first rate hike from November 2022 to May 2022.

Some bond rate measures that banks use to set fixed mortgage rates, or to hedge against rising rates, have actually peaked in two years, implying a significant rise in rates relative to their rates. ultra-low levels.

The three-year bank swap rate hit 0.95% on Friday, the highest level since July 2019, long before the outbreak of the pandemic. This rate has more than doubled in one month.

Unlike most countries where long term fixed rate mortgages are preferred, Australian borrowers have always had a preference for variable home loans. But that has changed somewhat since the pandemic.

In response to the pandemic, the Reserve Bank sought to assure borrowers and lenders that it would keep interest rates low for three years by directly targeting a three-year bond rate equal to the ultra-low cash rate in force, through intervention in the market.

This has enabled banks to offer attractive fixed rate mortgages with attractive financing for the term of the loan. The central bank has also made tens of billions of dollars available to banks in the form of a three-year 0.1% loan that can be backed by fixed-rate loans.

On Friday, however, the Reserve Bank was forced to intervene in the bond market and reaffirm its commitment to keeping rates low, as the April 2024 bond yield it was targeting as part of these measures increased.

The RBA’s pandemic response policies led more Australian borrowers to consider fixed rate home loans which were in most cases cheaper than variable home loans. The share of fixed-rate mortgage loans has risen from 20% at the start of 2020 to almost 35% today.

However, the Reserve Bank said in its October report Financial Stability Review report that borrowers were “well positioned to handle possible higher interest payments at the end of their fixed rate period in the years to come, as the interest rate cushions built into sustainability assessments loans represent potentially higher interest rates ”.


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