Mortgage Rates

Banks slash variable rates of interest at the same time as Reserve Financial institution stays firmly on maintain

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Lenders have cut adjustable mortgage rates to attract new customers in the booming pandemic real estate market, even as the Reserve Bank keeps official rates unchanged.

Important points:

  • The Reserve Bank has extended its $ 4 billion monthly bond purchase stimulus plan until at least mid-February
  • The move is in response to the economic impact of the lockdowns in NSW, Victoria, and the ACT
  • Banks have cut floating and short-term rates, but raised longer-term rates from the record lows at the beginning of the year

At its meeting today, the Reserve Bank left its official cash rate target at the record low of 0.1 percent, where it has been since November last year, despite extending other stimulus measures in response to the COVID delta outbreaks, as explained later.

However, while official interest rates remained unchanged, lenders were busy lowering their adjustable mortgage rates.

RateCity reports that the number of variable tariffs in its database rose below 2 percent from 28 to 46 in just two months. This is also more than three times the number of variable interest rates below 2 percent at the beginning of the year.

The cheapest of them is only 1.77 percent, although the average variable tariff for new customers is 2.72 percent.

There is a tradeoff, however. While floating rates continue to decline along with short-term one- and two-year fixed-rate mortgages, longer-term fixed rates are generally rising from record lows earlier this year.

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At the beginning of the year there were 32 four-year fixed loans with an interest rate below 2 percent and three five-year fixed loans below this benchmark. Now there aren’t any.

“Since COVID, fixed rates have been the battlefield for banks. However, given the record number of customers now on hold, some lenders are shifting their focus to floating rates, ”said Sally Tindall, Research Director of RateCity.

“Banks need to win, not lose, business if they want their loan books to move in the right direction.

“Well over half of all mortgage creditors still have variable interest rates. This is a huge market for potential refinancers that the banks must target.”

What did the reserve bank do?

Two women in work clothes walk past the Reserve Bank of Australia offices in Sydney. While the RBA has extended its bond purchases stimulus plan, it is still slightly reducing the amount of bonds purchased each week.

AAP: Dan Himbrechts

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While leaving the cash rate target at 0.1 percent, the interest rate on bank accounts with the RBA at 0 percent, and the bond yield target of 0.1 percent for Commonwealth securities due in April 2024, the Reserve Bank made a small move to prolong the stimulus.

In August, the RBA announced that it would reduce its government bond purchase program from $ 5 billion to $ 4 billion in early September and continue this rate of purchases through at least mid-November.

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However, the bank has now committed to extending its $ 4 billion-a-week bond purchase program through at least mid-February.

Government bonds are one of the most important benchmarks for market interest rates because they represent a relatively risk-free rate of return.

By buying bonds, the RBA increases its price, which in turn depresses the yield (or interest rate) on the bonds. This, in turn, should help lower the interest rates offered by financial institutions on products such as mortgages and corporate loans.

Reserve Bank Governor Philip Lowe is confident that the economic slowdown caused by the lockdown will only be temporary. He warned, however, that it could be at least a year from the outbreak’s onset before Australia was back where Delta was before Delta hit.

“The delta eruption is likely to delay the recovery, but not derail it,” predicted Dr. Lion.

“If vaccination rates continue to rise and restrictions are relaxed, the economy should recover. However, there is uncertainty about the timing and pace of this recovery and it is likely to be slower than it was at the beginning of the year.

“Much will depend on the health situation and the relaxation of activity restrictions.

“In our central scenario, the economy will grow again in the December quarter and will probably be back on the road ahead of the delta in the second half of next year.”

Response to the RBA’s move

The decision to reduce bond purchases even slightly, even though the program was extended, surprised some analysts, as many assumed the RBA will step back from what it calls tapering for the time being.

Fund manager Fidelity’s Anthony Doyle said, amid uncertainty about the virus and the economic outlook in NSW and Victoria, “today’s meeting should have announced an increase in bond purchases rather than a reduction”.

Man in a plaid shirt sits in front of three screens at a Bloomberg terminal. Anthony Doyle is an investment specialist at global fund manager Fidelity.

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“Today’s decision to curb the bond purchase program is a step in the wrong direction for monetary policy at this point,” he said.

“NSW and Victoria account for around 55 percent of GDP, and it is unclear how many economic scars have emerged from the prolonged lockdowns on residents of both states.

“Fortunately, the vaccination rate has increased significantly, which at the end of the tunnel provides a light as to when the barriers can gradually be lifted.

“It is undeniable that there will be some catching up to do with consumers, but this is likely to be mitigated to some extent by those who are reluctant to return to normal life in an environment of increased community COVID-19 cases – rather than none – even if they are fully vaccinated. “

Interest rates expected to be suspended for at least another year

Despite this uncertainty, many economists and most financial traders still expect the Reserve Bank to hike rates before 2024, which is the earliest time the RBA expects.

“We expect the bank to end its bond purchases in about a year and start raising rates in early 2023 and raising them to 0.75 percent by the end of 2023,” said Marcel Thieliant, senior analyst for Australia and New Zealand Capital Economics.

“This forecast is more optimistic than the analyst consensus, which does not envisage the first rate hike until the second half of 2023.

“But it would be later than expected by the financial markets, which are pricing in a 25 basis point increase by the end of next year.”

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