Australia’s banks in mortgage book reshape as rate hikes loom

Posted on - Financial Markets Worldwide

Please try another search

Economy6 hours ago (Nov 10, 2021 01:46AM ET)


Australia's banks in mortgage book reshape as rate hikes loom
© Reuters. FILE PHOTO: The logo of the ANZ Banking Group is displayed in the window of a branch in central Sydney, Australia, Aprl 30, 2016. REUTERS/David Gray/File Photo


By Paulina Duran

SYDNEY (Reuters) – Australian banks are offering lower variable-rate home loans even as funding costs rise in an attempt to lure customers away from fixed-rate mortgages and benefit from eventual increases in the overnight cash rate, analysts said.

With wholesale funding costs rising from ultra-cheap levels in recent weeks amid inflation worries globally, two big banks, Commonwealth Bank and Westpac Banking (NYSE:) Group, last week hiked their fixed-rate lending offerings by between 10 to 50 basis points, according to rate comparison site Canstar.

At the same time, the banks are cutting variable rates.

Australia and New Zealand Banking Group on Monday became the latest to cut certain variable rate products, following similar offers by Commonwealth Bank, Westpac and National Australia Bank (OTC:).

“What they are doing is they are luring people in with variable rates that look really, really cheap now, but they mightn’t be cheap when rates normalise,” said Brian Johnson, a senior banking analyst at Jefferies (NYSE:).

The cost of funding a fixed rate loan in the wholesale market as measured by the three year swap rate has doubled to 1.10% in the past month, leaving banks with little option but to move to shield their margins.

“The swap rate is usually what banks base their pricing for fixed rates – usually with a 2% to 2.5% spread between them,” says Jarden Chief Economist Carlos Cacho.

“So given three-year swap rates have picked up, we think in the next six months, you’re going to see more repricing coming through and probably the three-year fixed rate move to above 3%.”

The central bank cut its official cash rate to a record low of 0.10% last year as the pandemic slammed the economy.

Australia’s “Big Four” banks consequently all cut their fixed-rate mortgages but not their floating rates, as a cheaper way to lure borrowers in a country were variable rates were the norm.

That has since reshaped the A$1.8 trillion ($1.33 trillion) home loan market as customers flocked to refinance their mortgages with the fixed-rate loans, pushing them to account for about 40% of banks’ books.

But now analysts expect lower rates in the variable rate market will move the fixed level back down to the historic level of about 15% of the market.

“With the prospect of rates hikes now potentially within sight, I think (the banks) will be keen to shift more of the flow towards variable, so they get the uplift on interest income as rate hikes come through,” said Cacho.

The Reserve Bank of Australia has said it doesn’t expect to raise interest rates before late 2023, but markets are nonetheless pricing rate increases to come next year.

($1 = 1.3517 Australian dollars)

Related Articles

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

Read More

Leave a Reply

Your email address will not be published. Required fields are marked *