Mortgage rates set to tumble below 2%

The latest indicator mortgage lending rates from the Reserve Bank of Australia (RBA) revealed that the average discount variable mortgage rate was just 3.65% at the end of September, whereas the average 3-year fixed rate was even lower at just 2.35%:

According to RateCity, mortgage rates offered by Australia’s big four banks could fall below 2% if the RBA cuts the official cash rate to just 0.1%:

RateCity research director Sally Tindall said that if the cash rate was cut, the home loan rates of the big four were likely to fall below 2 per cent.

“There are 12 lenders now offering home loans below 2 per cent, and the list is growing by the week,” she said.

“With a possible rate cut waiting in the wings, we could even see a big four bank break the 2 per cent barrier over the next few months”…

In April the lowest variable rate across all lenders was 2.39 per cent. In September it was 1.89 per cent – a decline of 50 basis points.

The lowest rate for a two-year fixed rate mortgage in April was 2.09 per cent; now, it’s 1.99 per cent.

I’d previously worked off the assumption that with the RBA cash rate almost at zero, the 30-year decline in mortgage rates has run its course:

In turn, I’d argued that Australians would no longer be able to rely on the tailwind of falling interest/mortgage rates to help repay their debts, which would prevent home prices from inflating much faster than income growth.

However, the Term Funding Facility (TFF) recently set up by the RBA is a potential game changer. As noted by Nucleus Wealth’s Damien Klassen last week:

The Reserve Bank of Australia has begun providing three-year funding to banks at 0.25% for mortgages. Banks can probably use this money to go below 2% for three-year loans. And that is just the beginning. 

It started in April with an “initial” funding allowance for banks. Then an “additional” funding allowance. Now there is a “supplementary” one. 

There is clearly a risk of running out of adjectives to describe the bank funding. But there is no risk of running out of the desire to keep the property market ticking over with low interest rates and oodles of credit. The Treasurer’s announcement last week requesting banks to start lending irresponsibly confirmed that for anyone who still doubted.

Europe has already paved the way. The European Central Bank started with 0.1% funding for banks in 2014. By 2016 the rate was -0.4%. Now, -1.0%. Yes, the central bank will pay commercial banks up to 1% if they can just find someone (anyone!!!) who will just borrow the money.    

Thus, if the RBA follows Europe’s path, we could soon see the TFF eventually providing negative interest rates and plunging mortgage rates well below 2%.

When combined with the Morrison Government’s proposed gutting of responsible lending rules, easier access to credit alongside cheaper credit will obviously be bullish for Australian property prices (other things equal).

Unconventional Economist
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Comments

  1. Hopefully wages go down to counter the low interest rates, otherwise it’s back to the moon.

    • Wages are down, down, down. Rates of 2 per cent are high with zero wage growth and negative real growth. It’s the principal that matters too; what chances of this debt being repaid, ever? UBI just won’t cut it,that’s a poverty line measure, at best. Job Guarantee might if it lifts real wage growth. A debt jubilee will. I think that’s where it’s going.

      • Jumping jack flash

        Debt doesn’t need to be repaid, it just needs to be rolled over to the next person who is eligible for an even larger pile of debt than you were.

        In the New Economy only the biggest losers repay their debt with their own money. The winners of the New Economy use someone else’s debt to repay their debt.

        While they’re waiting for the right person to come along who is eligible for the enormous pile of debt to use to repay their debt (and pay out the equity and capital gains), they “service” their debt, but that doesn’t necessarily need to repay it.

        We are all banks now. Every last one of us. The assimilation is just about complete.

          • Jumping jack flash

            Its not cynicism, it’s fact.

            How many people sell their house to the next person for more than they paid before all the debt is repaid? How many people in trouble with repayments sell their house for (hopefully) a larger pile of debt than what they needed to take on to buy it?

            Look at this transaction as a transfer of debt, even though, technically, one pile of debt is repaid before the term, and a new pile of debt is created.

            Consider that the due date of the original debt pile and the amount of debt “repaid” up until that point in time are largely immaterial in the scheme of things and the only important aspect of the transaction is the debt itself and the total pile of debt that is in circulation in the economy at any point in time.
            Oh, and finally, that the bank gets all their interest due.

        • ok, you’re right up but only up to a point. There are many who view the purchase of a house as a home, not, or not just, an investment. To do so they often take on a pile of debt with the intention of repaying it to zero. I know lots and I would like to know the actual percentage. Your scenario does not even account for this, and that’s a fact.

  2. Display NameMEMBER

    My older son wants to buy a place in Sydney next year with some help from his parents. I am not keen on seeing my money burned in 12-24 months. It may be a hard conversation.

    • happy valleyMEMBER

      Ditto my son and he wants to run before he walks – not happy unless the place in the very inner suburbs of Sydney. Son – set your sights somewhat lower and the Bank of Mum and Dad might be amenable. It is a responsible lender unlike the technically insolvent and irresponsible Strayan retail banks.

    • I don’t envy your position as parents with children looking to enter the market but the reality is well located properties in this climate will likely go to those who are most prepared to (perhaps foolishly) extend themselves up to their maximum borrowing limit. We are living in times where a fiscally conservative and prudent borrower on a higher income will likely lose out to someone on a lower income but willing to stretch to the limit his max borrowing capacity and take on LMI. In this situation the profligate will come out ahead as he enters the market a rides asset price inflation to paper gains whilst the prudent continues to lose out. It will all end in tears but no one knows when that will be.

      • Display NameMEMBER

        He wants to buy a unit close into city. He understands most are junk builds unless done by major construction companies. But either way he is also certainly going to be in negative equity within 24 months. And that is potentially my equity as well.

          • ErmingtonPlumbingMEMBER

            Yes the main contractors are all in the same race to the bottom too. It’s been going on hard since the mid 90s
            I had some involvement with both the construction, Defect rectification and maintenance of the Bennelong Apartments over a 10 year period Starting from 97
            Built by Multiplex in the late 90s these 3 buildings (the most expensive per m2 appartments in Australia) are riddled by defects and poor construction.
            I have numerous horrendous anecdotes I could share.
            https://en.wikipedia.org/wiki/Bennelong_Apartments

          • Absolutely agree. I have a raft of stories from builder acquaintances working for some of the biggest Australian companies- wouldn’t touch any of their products at all.
            Let alone the stories,photos DFA have pit up from time to time.

  3. happy valleyMEMBER

    Time for the RBA happy clappies to r.pes savers and depositors again – it’s the whole-of-gubmint happy clappy way.

  4. Even paying off the mortgage is a sh1t investment these days. Seems to be tech shares or bust at this point.

  5. pfh007.comMEMBER

    “..When combined with the Morrison Government’s proposed gutting of responsible lending rules, easier access to credit alongside cheaper credit will obviously be bullish for Australian property prices (other things equal)…”

    And who is going to argue against this brilliant strategy apart from the “money cranks” who think a public monetary system should be operated democratically and in the interests of the public?

    The RBA will stand ready to buy up rich people assets like bonds (public and private) including mortgage backed securities so they can hold down interest rates across the event horizon so that those the bankers deem credit worthy can use the cheap money to buy up assets hand over fist.

    Endless money creation into the hands of the wealthy is apparently a good thing because not only will it allow the rich to seize control of assets it will drive down the value of the exchange rate and make everyday life more expensive for the little folks.

    A win all round….provided you are not little folk.

    • Will interest rates ever rise again?
      I’m happy to pay more off my mortgage, plus get more from tax cuts, but how long you think we will have interest rates this low?

      • pfh007.comMEMBER

        Mark777,

        Interest rates will only rise if inflation (as measured by the ABS) rises. But that is not likely to happen while incomes of the general public drift along going nowhere and workers are having their wages driven down by guest workers imported by the government by the plane load.

        And even if inflation does start to increase the RBA and the government are mostly going to crank down on credit creation to households (assuming any of them have any capacity to absorb more debt) and instead make credit even more available to the big end of town so they can continue the process of concentrating wealth amongst the top 10 – 1% of the population.

        This terribly serious but the hear are crickets or worse those who think that this process is GREAT because it may devalue the AUD and drive down the exchange rate. Doh. Just what a country without productive capacity by choice needs.

        • Fair point, would have thought inflation from imports with lower AUD would hurt, but I’m not seeing it.

  6. If your parents beat you senseless for eating greens and brushing your teeth, and praise and give you money for eating lollies and takeaways, what do you do? Even the prudent dont really have a choice. May as well live it up in the short term and suffer consequences downstream.

  7. Jumping jack flash

    They’re fixing the eligibility problem. Good to see.
    Negative interest rates will follow soon.

    The final hurdle is doing something about that enormous ponzi buy-in fee, aka the deposit.

    5% of a million dollars for a starter house in the outer suburbs is getting pretty hard to save up.

    If the median house price needs to get to 10 million by 2050, and median wages probably aren’t going to crack 90K over the same period, how do you save up 5% for the deposit?

    Eat tinned tuna and iceberg lettuce for 20 years? This will be the next thing they need to address if they want to get, and then keep, the debt growing at the required rate.

  8. The90kwbeastMEMBER

    Paging bcnich, weren’t mortgage rates going to head up and crash the property bubble over the next couple of years?

    This doesn’t bode well for that theory.

    • Yeah where is bcnich.
      I think the theory was that the ovverseas lot will ask for a higher risk premium and something about inflation..
      RBA monetising 40% of the debt of the banks takes care of the first part. Inflation = dead.
      Then there is the prediction of an overseas crash flowing through here.. well. I dont know. I guess that is true on any given day.

      • The90kwbeastMEMBER

        More around bad debts driving up the borrowing costs I thought but probably the above too.

        Fact is the RBA will just prop everything up, as per above.

        • Yeah thats right. Ok still could happen spose.
          I mean there are those 10s of thousands of people not even picking up phone calls.

  9. Australia is 100% bezzle. Absolutely corrupt to the core. The people taking the pi55 out of convict culture have been correct all along.

    That said, mortgage rates aren’t going to bring jobs back.