Why Banks Raise Fixed Mortgage Rates


Major Australian banks are raising their fixed-term mortgage rates in response to concerns about soaring inflation in the United States.

Anyone who wants a three-year fixed home loan from one of the Big Four banks will have to pay at least 2.89% now.

And anyone who wants to fix their loan for four years will have to pay a minimum of 3.19%.

The National Australia Bank is leading the way with interest hikes, having already raised rates twice in December.

But variable rates are much lower and are expected to stay that way for years to come, with all the major banks offering them below 2.3%.

Why fixed rates are on the rise

So why are lenders increasing fixed rates?

It all comes down to what’s happening in the international bond markets.

Since fixed rate loans require a bank to charge borrowers the same interest rate over a period of time, the funding they need to access to offer this product must also cost them the same amount over time.

As a result, banks source the money they lend to fixed rate borrowers from international bond markets, rather than short-term spot markets where the cost of funding is more volatile.

Banks issue one, two, three, four, and five-year bonds to investors, which charge a fixed interest rate over that period.

And this is where what’s going on in the world affects how much people pay for their mortgage in Australia.

How Global Inflation Affects Local Mortgage Rates

Inflation is skyrocketing in the United States and investors fear this trend will continue and prices in the global economy will continue to rise rapidly.

As a result, they demand greater compensation (i.e. higher interest rates) for holding bonds (i.e. lending to banks) in order to avoid inflation. higher does not hurt their returns – and this increases costs for banks, which then pass on those higher costs. to consumers.

Rising government bond rates are a good indicator of this trend.

“The 10-year Australian government bond is earning 1.6%,” said Laurie Conheady, fixed income specialist at JB Were.

“In September, it was 1.1%. It reached 2% in October and fell back to 1.6%.

Mr Conheady said that despite the falls in recent weeks, “they are expected to increase” due to global inflation, which means even higher fixed rates for homebuyers. .

The good news: variable rates will stay low

Despite banks raising their forward rates in recent months, “the short term hasn’t really moved,” Conheady said.

That’s because the Reserve Bank is telling the world that short-term rates will stay at their lowest levels until at least 2023.

The RBA is keeping its spot rate at an all time high of 0.1% and the market rate set with that in mind is even lower.

“The 90-day banknote swap rate [a money market commercial rate] is 0.07% right now, which is below the RBA’s cash rate level, ”Mr. Conheady said.

These short-term rates apply to the funding markets from which banks source to provide variable rate mortgages.

So if they’re low, then variable mortgages are low.

And they should stay low in the near term, because “there is a lot of competition between the banks,” Conheady said.

The RBA has also said it is unlikely to increase the official cash rate until 2023, so homebuyers can expect the good times for standard variable rates to continue.

“You wouldn’t expect anything to change too much over the next 18 months,” Mr. Conheady said.

And that also goes the other way around.

The RBA has virtually no wiggle room to cut the official spot rate further – so just as variable rates are unlikely to rise in the short term, they are unlikely to fall either.

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