The impending expiration of the Reserve Bank’s $ 200 billion emergency financing program to mitigate the blow of the COVID-19 pandemic is the next trigger for the mortgage loan rate hike.
The device, which is scheduled to close at the end of June, has revolutionized the financing of mortgage loans, leading to a massive increase in fixed-rate loans.
Fixed rate loans now account for around 35% of all new mortgages, with some banks reporting an even higher percentage than that.
This is more than double the proportion of fixed loans compared to before the pandemic, as homebuyers lock in loans below 2%.
Another thing to note here is that these loans are much more important to cope with higher real estate prices and there are a lot more of them considering a rapid increase in the rate of mortgage loans issued.
About $ 90 billion of the financing plan remains unused and when completed some of the cheapest fixed rates offered could rise, although variable rate loans are likely to remain at historically low levels.
Blended finance for bank loans has changed dramatically
The Term Finance Facility (TFF) has also radically changed the way Australian banks finance their mortgages.
Normally, they would raise around $ 100 billion a year in wholesale funding from foreign and local investors, but this has been sharply reduced to around $ 5 billion in the local market and $ 15 billion internationally.
Instead, the increasing amounts placed on bank deposits and the Reserve Bank’s TFF facility have done much of the heavy lifting in financing the cheap fixed rate home loans on offer.
Fixed rate hikes shouldn’t cool the housing market
While the end of the TFF may not herald a radical change, it should lead to further hikes in two- and three-year fixed rates.
Most observers say these changes will not be enough to calm the raging real estate market.
This is especially the case if floating rate loans remain low, which is likely due to the proposed longevity of the RBA’s 0.1% spot rate.
Estimates of what banks would have to pay to get three-year financing in the local market is about an additional 0.25%, which, while still minimal, would be enough to trigger a hike in fixed lending rates. over the same period.
RBA will need to be cautious as some borrowers are “vaccinated” against higher rates
The issuance of so many fixed-rate loans also confuses matters a bit for the Reserve Bank, as these borrowers – especially those with loan terms of up to five years – are now virtually “vaccinated” of any kind. rising market interest rates.
However, these borrowers still represent only a fraction of all outstanding loans and the RBA cash rate will remain a powerful tool to send messages about tighter credit terms if and when the need arises. .
Although the RBA has been firm in saying that it does not intend to increase the cash rate until 2024, even after that date it will need to be cautious given the sheer volume of real estate debt that can now be found in household balance sheets.
With average loan amounts well over $ 500,000, many borrowers will be very sensitive to even small increases in mortgage interest rates.
This will include those who have variable rate loans who immediately feel the effect and those who will still have to renegotiate the fixed rate loans as the current low rate loans expire.