Before a key Reserve Bank meeting this week, Australia’s biggest banks have been pushing up their fixed rates and walking away from the ultra-competitive approach they took to attract customers to this type of mortgage during the pandemic.
NAB increased its fixed rates for owner-occupiers and investors on Friday for the second time in a week – meaning some rates rose by up to 0.5 percentage points within the space of eight days – in a sign the big banks are seeking to offset rising funding costs.
It follows similar hikes by CBA, Westpac and ANZ earlier this month, leaving no fixed rates among the big four banks below 6 per cent. The changes only affect rates on new fixed-rate loans, not the rates paid by existing customers.
RateCity research director Sally Tindall said banks were no longer interested in offering the lowest fixed rates on the market because of factors including an increase in their funding costs.
“There’s been a significant rise in the cost of funding in the last 12 months which has flowed through to both fixed and variable rates,” she said. “Rising cash rates have made the cost of funding expensive all over the world.”
Fixed-rate mortgages have historically played only a small role in Australia, but the extraordinary fiscal stimulus of the COVID-19 pandemic changed all that. Banks slashed fixed-interest mortgage rates to less than 2 per cent in many cases, and customers leapt at the opportunity to borrow so cheaply, causing fixed-rate lending levels to surge.
“Banks were fighting tooth and nail for customers during COVID but refinancing has become costly for banks, so they want the churn to stop,” Tindall said. “When it comes to banks lifting their fixed rates, it’s more a matter of why not.”
Competition for fixed-rate customers has eased. While in July 2021, a record Australian high – 46 per cent – of new and refinancing customers were on fixed rates, Tindall said that figure had now “fallen off a cliff” to about 5 per cent.
“The consequences of having uncompetitive fixed rates aren’t huge because there’s not much competition in the sector right now,” Tindall said.
“Banks don’t want to be left out of the pocket when there’s rising pressure on fixed-rate funding. They want a buffer when they can, without broad consequences in securing business.”
Banking analysts also believe competition in mortgages has eased lately – UBS this month said its data showed competition between the big four had become more “rational.”
Fixed rates also move in line with the money market’s expectations of where official rates are heading – reflected in bond pricing. That, in turn, depends on the outlook for inflation and the economy.
Canstar group executive Steve Mickenbecker said the case for falling interest rates – and therefore falling fixed rates – was fairly weak.
“I can’t see a fall in long-term rates any time soon because the expectation is that there’ll be a pretty soft landing which means there won’t be a strong case for early easing of interest rates,” he said.
While the Reserve Bank’s unconventional bond-buying policies held down bond yields during the pandemic, which flowed through to ultra-cheap fixed-rate loans, Mickenbecker said interest rates and fixed rates offered during that period were extraordinary.
“Interest rates have been more normal recently than those we’ve seen in the last few years,” he said. “To suspect they’re so far out now that they must fall is not really realistic.”
Money market traders last week pared back their bets on an RBA rate rise this Tuesday after figures showed inflation was slowing faster than expected and retail sales fell. NAB economists on Friday said markets were only pricing a 24 per cent chance of a hike in the cash this week.
However, economists say it will be a close call for the RBA board.
The country’s largest bank, CBA, is expecting a final cash rate hike in August to 4.35 per cent while NAB sees the cash rate peaking at 4.6 per cent and staying there until March 2024.
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Source: Thanks smh.com