Some Observations On Home Loan Interest Rates

There is a staggering 800,000 Australian fixed rate home loans coming due during the 2023 year, that’s right 800,000.  That means 800,000 mortgage holders having to make a decision whether to re-fix or allow their loan to convert to variable. Either way it is going to involve a significant increase in the cost of an awful lot of mortgages – hence the often described “mortgage cliff” that is coming.

That makes the analysis of fixed rate movements even more interesting.

Whilst we saw the Reserve Bank of Australia (RBA) start it’s phase of rate increases in mid-2022, the fact remains that the fixed rates offered by our banks had already been increasing for around 6-8 months, starting in late 2021. This is because the Australian banks fund their home loan books from a mix of domestic deposits (ie:  from the money we place in savings accounts here in Australia) and then borrowing they need from overseas markets.  The cost of overseas market borrowings, particularly for longer term debt, was increasing so the banks passed that on via increasing their fixed rate offerings to us mortgage holders.

When the RBA doubled down on this with increases to it’s own official cash rates we saw a savage reaction from the Australian Banks. Whilst the variable rates generally went up in line with movements from the RBA, the fixed rates in some cases lunged upward in excess of 1.00% in anticipation of the further rate increases to come.

Economists were largely divided as to whether the banks had gone too far too early with their fixed rate increases.  The fact that roughly one third of Australia’s banks and mortgage lenders at some stage made downward adjustments to their fixed rate offerings suggests that, at least for some of them, it is indeed the case.

As is always the case, each interest rate increase by the RBA brings you one step closer to the rate peak and we have seen much of the recent debate change from how many more rate increases are still to come – to when they might even start decreasing. Rate decreases, when they start and how quickly they go down will primarily be determined by 3 factors:

1. The cost to the banks of their overseas funding
2. Whether the RBA becomes comfortable that Australia’s rate of inflation is under control, and
3. If Australia does in fact fall into recession.

Nobody has the crystal ball, even the RBA themselves who have a very unfortunate and well publicised recent track record with regard to rate forecasts. So the banks and markets do their own analysis and react accordingly. This has seen some lenders reacting to the most recent RBA rate hike in what us mortgage holders might think is a strange way.

What do I mean by strange?

Well lets looks at Suncorp’s reaction to the latest RBA rate increase on the 8th of February…………

                Variable               ↑           0.25%    (in line with RBA increase of 0.25%)
                Fixed 1yr              ↓           0.40%
                Fixed 2yr              ↓           0.41%   
                Fixed 3yr              ↓           0.51%   
                Fixed 5yr              ↓           0.20%   

And they are not alone, similar adjustments have been made other Australian banks and mortgage lenders.

So why?

It is simply a reflection that Australia’s banks believe we may be closer to the peak of rate increases than not and, particularly if Australia ends up in recession, the next major move in interest rates could in fact be downward.

As always, any home loan rate decision you make should take into account not only your own opinions of where rates might be heading, but also your personal circumstances. It is an important decision that should be made with the guidance of a professional, ideally an MFAA accredited Mortgage Broker.

Source:  Mick Doyle, Accountplan Finance Solutions

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