The end of a Reserve Bank program means funding costs are about to get more expensive for banks
The end of a $200 billion Reserve Bank funding scheme is expected to push mortgage rates up from their current ultra-low levels and dampen the red-hot demand for housing.
The RBA launched the program – the term funding facility (TFF) – last year in an effort to mitigate the economic impact of the COVID-19 pandemic. Australia’s banks only have about six more weeks to draw down on $90 billion in cheap funding under the scheme, according to a report by The Sydney Morning Herald.
Under the TFF, banks are able to borrow from the RBA at a 0.1% interest rate, which has helped push fixed rates on mortgages below 2%.
The conclusion of the TFF will leave banks more reliant on wholesale markets for their funding, which will increase their funding costs. Those extra costs will likely be passed on to customers through higher fixed rates, potentially throwing some cold water on the red-hot housing market, the Herald reported.
Credit market expert Dr Phil Bayley, principal of ADCM services, estimated that if banks were raising three-year funding on the domestic market, rather than drawing on the TFF, they would need to pay about 0.25 percentage points over the 90-day bank bill rate of 0.04%.
“It may not look like much, but it would be an effective tripling of the current cost,” Bayley told the Herald. “I think we can expect to see mortgage rates moving up gradually after the 30th of June.”
Matthew Wilson, analyst for Evans and Partners, said that the TFF has contributed to the proportion of new fixed-rate loans more than doubling to about 35% of all new mortgages.
“The availability of the TFF has enabled banks to strategically offer lower fixed rates,” Wilson told the Herald. He said that when the program ends next month, banks will remove their cheapest fixed-rate deals from the market.
Commonwealth Bank may be a bellwether for future hikes – it increased its three-year fixed rate by 0.05% on Friday. Longer-term fixed rates are also creeping up in response to rising bond yields.
The RBA has repeatedly said it does not expect the cash rate, which affects variable rates, to move until at least 2024.
Prior to the COVID-19 pandemic, Australian banks raised more than $100 billion annually in wholesale funding from foreign and local investors, the Herald reported. However, the bank’s debt issuance slowed dramatically during the pandemic as lenders were inundated with deposits, and as they accessed the TFF. So far this year, banks have only raised $5 billion in the domestic market and $15 billion internationally, Bayley told the Herald.
David Plank, head of Australian economics at ANZ, said that from the second half of 2021 banks would start issuing more wholesale debt, and that there would be upward pressure on two- and three-year fixed rates, which would have some effect on the housing market “at the margins.”
However, Plank told the Herald that he didn’t expect “major change” as a result of the rise in bank funding costs. He said that ANZ still expects house-price growth of 17% this year.
Andre Murray, chief executive of Curve Securities, told the Herald it would take time for the end of the TFF to have a big impact, but it would cause a small hike in rates on term deposits and fixed-rate loans.
“if I had a loan I wanted to fix, I would certainly be looking to lock that in for three to four year,” Murray said. “There’s very little risk of it going lower.”
Experts said that rate rises would be limited by the degree of household leverage. Wilson told the Herald that the average home loan had spiked from $366,000 in 2010 to $575,000 today. That rise in household indebtedness means any increases in the cash rate would need to be very gradual, he said.
“If the cash rate goes up to 100 basis points, you could start to see some real pain,” Wilson said.