The looming expiry of the Reserve Bank’s $200 billion emergency funding scheme to soften the blow from the COVID-19 pandemic is the next trigger for higher home loan rates.
The scheme, which is due to close at the end of June, has produced a revolution in funding home loans, prompting a massive rise in fixed rate loans.
Fixed loans now represent about 35% of all new mortgages, with some banks reporting an even higher percentage than that.
That represents a more than doubling of the proportion of fixed loans compared to before the pandemic as home buyers lock in loans below 2%.
Another thing to note here is that these loans are much bigger to accommodate higher property prices and there are a lot more of them, given a rapid increase in the rate of home loans issued.
Around $90 billion of the funding scheme remains undrawn and when it is finished, some of the cheapest fixed rates on offer might increase, although floating rate loans are likely to remain around historic lows.
Banks loan funding mixed has changed dramatically
The term funding facility (TFF) has also dramatically changed the way Australia’s banks fund their mortgages.
Normally, they would raise around $100 billion a year in wholesale funding from foreign and local investors but that has been sharply reduced to about $5 billion in the local market and $15 billion internationally.
Instead, rising amounts placed on deposits at banks and the TFF facility from the Reserve Bank have done much of the heavy lifting in funding the cheap fixed rate home loans on offer.
Rises in fixed rates unlikely to cool the housing market
While the end of the TFF may not herald a dramatic change, it is likely to lead to further rises in two and three-year fixed rates.
Most observers say these changes won’t be enough to cool the raging property market.
That is particularly the case if floating rate loans stay low, which is likely given the proposed longevity of the RBA’s 0.1% cash rate.
Estimates of what the banks would need to pay to get three-year funding on the local market are around an extra 0.25%, which while still minimal would be enough to spark a rise in fixed loan rates over the same period.
RBA will need to step carefully, with some borrowers “vaccinated” against higher rates
Writing so many fixed rate loans also muddies the waters a little for the Reserve Bank, with these borrowers – particularly those with loan terms up to five years – now virtually “vaccinated” from any rise in market interest rates.
However, these borrowers still only represent a fraction of all outstanding loans and the RBA cash rate will remain a powerful tool in sending messages about tighter credit conditions if and when the need arises.
While the RBA has been firm in saying it does not intend to raise the cash rate before 2024, even after that date they will need to tread carefully given the sheer volume of housing debt that now sits on household balance sheets.
With average loan sizes jumping well above $500,000, many borrowers will be highly sensitive to even very small rises in home loan interest rates.
That will include those on floating rate loans who feel the effect immediately and those who will still need to renegotiate fixed rate loans as the current low-rate ones they are on expire.