Given the talk about rising inflation and interest rates, it is not altogether surprising that banks have lifted their fixed home loan rates. But that does not mean their variable home loan rates should begin rising, and we should not let banks pretend they are doing it tough.
Two weeks ago NAB raised its fixed home loan rate by 0.2 percentage points, and last week the Commonwealth Bank and Westpac followed.
Fixed rates, by their very nature, tend to move up or down faster than variable rates. Fixed-rate loans in effect anticipate movements in interest rates. If banks believe that in the next three years interest rates are going to rise, then they will start to raise fixed-rate loans.
This happened in 2009 after the GFC when fixed-rate mortgages started rising six months before variable rates did and then in turn fell more quickly than variable-rate ones over the past decade:
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So given inflation and rate rises are expected to rise, you would expect banks would rush to cover themselves by raising the fixed rate.
But while everyone appears to be certain that rates are going to go up sooner than previously expected, even in the past week expectations have dampened a bit.
Prior to the Reserve Bank’s meeting last week, the market was predicting the cash rate to reach 1.0% by November next year. But by Friday that expectation had been pushed out to February 2023:
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So while the banks are justified to raise fixed rates, we should not let them start pretending life has suddenly become hard for them.
For example, last week a spokesperson from the Commonwealth suggested the increases “reflect the steep increase in funding costs over the past few weeks”.
Well now.
Yes, in July the RBA stopped its term funding facility, which was set up to provide $188bn to the banks for fixed-rate loans during the pandemic. But even still, funding remains very cheap.
Last Friday the Reserve Bank’s latest statement on monetary policy noted that “banks’ overall funding costs remain close to historic lows”.
The short-term borrowing costs on the money-market, for example, remain well down on those of the past decade, and even below that of the cheap-money era of the mid-2000s:
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It is even better for banks when you consider that the majority of bank funding comes from deposits – both in savings accounts and term deposits.
The Reserve Bank found banks’ funding has become more dependent on deposits, and that “funding costs have also benefited from the strong growth in low-rate deposits over the past year or so”. The RBA estimates that “deposits now account for around 60% of banks’ total funding – around 5 percentage points higher than before the pandemic”.
And that money is dirt cheap.
The RBA found that two-thirds of those deposits (or 40% of banks’ total funding costs) were paying an interest rate of 0.25% “or less”.
That is well below that latest inflation rate:
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Think of it like this – deposits rates are what the banks pay, while loan rates are what they get. Over the past decade and during the pandemic, deposit rates have fallen by much more than mortgage rates:
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When interest rates are high, both mortgages and term-deposit rates go up and down by about the same amount. But more recently, for every 1 percentage point fall in the mortgage rate, term deposit rates have gone down by 1.5 percentage points:
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It means that while mortgage rates are low in real terms, real term-deposit rates are negative – the value of your money falls while it is in a term deposit:
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The gap between mortgage rates and both term-deposit rates and the cash rate is now as wide as it has ever been.
In the past the discounted mortgage rate was about 1.5 percentage points higher than term-deposit rate. Now it is 3.2 percentage points higher:
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Such is the increase of the gap between mortgage rates and the cash rate that were it the old pre-GFC gap, the average discounted mortgage rate would be 1.35% rather than 3.45%:
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So while banks might have some justification for increasing their fixed home loan rates, let us not allow them to cry poor.
Their funding costs remains at historic lows and there is zero justification for them to begin increasing variable mortgage rates before the Reserve Bank does.
