Why Banks Raise Fixed Mortgage Rates Despite RBA Decision

The RBA still hasn’t raised interest rates, but that won’t stop the banks from doing something that will cause a world of pain for Australian homebuyers.

Even though the RBA has yet to raise the official interest rate, banks are raising their fixed mortgage rates. Banks are sniffing the wind. They can sense the rate hikes on the horizon. They don’t want to be forced to lend homeowners at a low fixed rate for several years if interest rates are high by then.

ANZ Bank expects fixed interest rates to rise “substantially” over the next few months, senior economist Felicity Emmet said in a note to clients this week. This will lead to a slower increase in house prices, she said.

“The lowest mortgage rate available to new borrowers is already out of all-time lows seen earlier this year and is expected to rise significantly in the coming months, which will reduce borrowing capacity and slow house price gains.” , Emmett said.

Fixed mortgage rates are interest rates that don’t change. They are “fixed” for a fixed period, generally two or three years. It’s a good deal for borrowers if you can land one right before interest rates go up.

The following chart shows fixed mortgage rates versus “swap rates” – a type of interest rate that depends on future interest rates. As you can see, the fixed interest rate usually follows the swap rates. And now swap rates have skyrocketed. We can expect fixed interest rates to rise. (But only for new loans, the rates for loans already made are fixed! That’s why they call them fixed.)

The fix is ​​in

Australia has always been a nation in love with the adjustable rate mortgage. But in recent years, the fixed rate mortgage has become very popular. It was by far the cheapest rate you can get and Australians have borrowed loads on it. In fact, almost half of all new mortgages are fixed rate. This means that a rise in fixed interest rates is significant.

The RBA has several ways of influencing mortgage interest rates. The most important is the official interest rate. They reduced that number to 0.1% and have committed to leaving it there for the foreseeable future.

But they also played with other interest rates, trying to keep them low. One was the interest rate on a bond that was due to expire in April 2024. Last week they decided to stop gambling with that bond, and voila, its interest rate (technically known as. yield) has skyrocketed.

So now everyone expects interest rates to be higher in a few years. The important thing to know is this: The RBA’s decision to stop intervening in this market is the cause of the rise in interest rates. It is monetary policy in action.

The terrible dilemma of the young

Higher interest rates should keep house prices from rising so quickly. Which is a relief, considering CoreLogic data shows it has grown by over 21% in the past year alone.

But of course, higher interest rates don’t make buying a home cheaper. In fact, they increase repayments. When you borrow $ 500,000 at 2% on a 30-year loan, your lifetime interest payments are $ 165,000. But if the rates go up to 3%, your lifetime interest payments are $ 260,000.

The truth is, over the life of a 30-year loan, rates could reach well over 3%. Fixed interest rates could even reach 3% by the end of the year and continue to rise.

The lamentable thing about this moment in history is that due to shockingly high real estate prices, young people have had to save for years – decades in some cases – to muster down payment for money. lodging. This same generation of home buyers is also likely to face an increase in interest rates over the life of their loan. It’s a double whammy. People who bought 15 years ago, of course, had the exact opposite experience.

Jason Murphy is an economist | @jasemurphy. He is the author of the book Incentivology.

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