The end of a $200 billion emergency Reserve Bank funding scheme put in place to mitigate the impact of the coronavirus crisis is expected to lift fixed mortgage rates from ultra low levels and dampen soaring demand for housing.
The country’s banks have about six weeks to draw down on $90 billion in cheap credit being provided under a central bank program that was designed to soften the blow from the coronavirus pandemic. The end of the program comes amid a broader economy recovery and surging real estate prices that have sparked concerns the property market is overheating.
The conclusion of the scheme, launched last year and known as the term funding facility (TFF), will leave banks more reliant on wholesale markets for their funding. Experts said this would increase banks’ funding costs, which would be passed on to customers via higher fixed rates, potentially taking some of the extreme heat out of the property market.
Under the Reserve Bank scheme, banks are able to borrow from the central bank at an interest rate of 0.1 per cent, which has helped drive fixed interest rates on mortgages under 2 per cent.
Credit market expert Phil Bayley, principal of ADCM services, estimated that if banks were instead raising three-year funding on the domestic market, they would need to pay about 0.25 percentage points over the 90-day bank bill rate of 0.04 per cent.
“It may not look like much but it would be an effective tripling of the current cost,” Dr Bayley said. “I think we can expect to see mortgage rates moving up gradually after the 30th of June.”
Evans and Partners analyst Matthew Wilson said the RBA’s term funding facility had contributed to the proportion of new loans that were on fixed rates more than doubling to about 35 per cent of all new mortgages.
“The availability of the TFF has enabled banks to strategically offer lower fixed rates,” he said.
Mr Wilson said that once the scheme ends next month, banks would remove their cheapest fixed-rate deals from the market.
The Commonwealth Bank gave an early sign of the pressure on fixed-rate funding when it increased its three-year rate by 0.05 per cent on Friday, in a move that rivals are likely follow. Longer term fixed rates are also rising in response to higher bond yields.
The RBA has said it does not expect to move the cash rate — which affects the variable rates paid by most borrowers — until 2024.
Before COVID, Australian banks raised more than $100 billion a year in wholesale funding from foreign and local investors, but the banks’ debt issuance slowed dramatically in the pandemic, as lenders were flooded with deposits and as they accessed the RBA’s facility. Dr Bayley said so far this year, banks had only raised $5 billion in the domestic market and $15 billion internationally.
ANZ Bank’s head of Australian economics, David Plank, said from the second half of this year banks would start issuing more wholesale debt. He said there would be upward pressure on two and three-year fixed rates, which would make some difference to the housing market “at the margin.”
Even so, Mr Plank said he did not expect “major change” as a result of the rise in bank funding costs, noting ANZ still expects house price growth of 17 per cent this year.