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 (CBA.AX) and Westpac Banking Group (WBC.AX), 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 (ANZ.AX) on Monday became the latest to cut certain variable rate products, following similar offers by Commonwealth Bank, Westpac and National Australia Bank.
“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.
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.