Fixed interest rates for both owner-occupiers and property investors in Australia have rarely been more attractive than the past year, but could all of this be coming to an end. This week our team at Loansuite takes a look at what has led interest rates to be at such record low levels for fixed loans, and where they could be heading next.
First, it’s important to understand how a bank obtains the funds that it lends to customers. Typically, banks and other lenders in Australia will obtain their funding from both retail and wholesale deposits, which can be in the form of both debt and equity. The Reserve Bank of Australia (RBA) sets the cash rate, which largely impacts the cost of funding for the banks, as it will dictate the level of interest, or return, that they need to pay on the deposits they’re holding.
In March of 2021, the RBA highlighted that the wholesale debt costs for Australian banks have achieved new lows, sitting at approximately 0.5% per annum, from over 4% back in 2011, just 10 years ago.
Further to this, because deposits were decreasing throughout 2020, the RBA announced that they would provide the Australian banks a temporary funding source, which became known as the Term Funding Facility (TFF), and that the amount would be $200 billion. The cost of the funds to the banks would be at the benchmark rate of just 0.25%. The funding became available to the banks at a cost of just 0.25% per year for 3 years, which meant that they could significantly boost their lending activity.
Before we explore what happens next, it’s important to understand why the RBA launched such a funding facility in the first place. There were two goals of this project, which we’ve outlined below:
- Reduce the borrowing costs, in the form of interest rates for borrowers, which stimulates property activity and our construction industry.
- Encourage lenders to support businesses that may be facing headwinds due to Covid-19 by having access to low-cost funding. The Small and Medium-sized Enterprise (SME) sector in Australia is a significant portion of our overall economic activity, so this was a critical area to support.
What is happening now, is that the RBA is signaling that access to the TFF will cease on 30 June 2021, which means that access to a significantly low-cost source of funding for the banks will disappear, and they will be back to relying on wholesale and retail deposits. This will in turn likely increase their costs of accessing funds, which they’ll, in turn, need to recoup by raising fixed interest rates for borrowers. This also means that the RBA doesn’t even need to increase the cash rate to increase the cost of funding for the banks.
We have already started to see some lenders increasing their investment loan rates while keeping the owner-occupier rates at the lower levels with a view to recouping the lost margin.
If you’re currently exploring your options with regard to fixing your loan, refinancing, or even considering a split between fixed and variable, be sure to seek professional advice here. This could be an opportune time to take advantage of the low fixed rates while they’re still available. If you’d like to explore your options with our team, please reach out and book at a convenient time that suits you.
LoanSuite Pty Ltd is your lending partner for all of your home loan, investment property, business and commercial financing needs. With our wide range of lending solutions, expertise in financial planning and investment strategies, and extensive experience in working with both Australian residents and Australian expats, we are your partners for your lending needs.
Book an obligation-free, complimentary consultation here today.
LoanSuite Pty Ltd is an Authorised Credit Representative (Credit Representative Number – 494608) of My Local Broker (Australian Credit License – 481374). Important Disclaimer: Your complete financial situation will need to be assessed before acceptance of any proposal or product.