Have mortgage rates bottomed?

Some economists believe that fixed mortgage rates in Australia might have hit their bottom:

The Reserve Bank Of Australia has been buying up government bonds to maintain record-low interest rates.

According to the National Australia Bank, the RBA will own nearly all April 2024 bonds by the middle of this year.

Economists say this will make it unlikely that interest rates will move significantly lower from their current rate…

Equity Economics lead economist Angela Jackson said these conditions made significantly lower interest rates unlikely.

“It’s hard to see [the banks] going much lower”, she said.

“Banks may choose to go slightly lower but I can’t see any significant downward movement.”

AMP Capital’s Head of Investment Strategy Shane Oliver agreed.

“It’s very hard to see fixed rates going a lot lower unless the Reserve Bank is prepared to take interest rates, including the three-year bond yield, negative,” he said.

“[The RBA] on previous occasions have said that’s very unlikely.

“Unless the RBA is prepared to buy more bonds, which it’s hard to do anyway because it has just about all of them, it’s hard to see that yield going any lower.

“Consequently it’s hard to see 3 year [mortgage rates] going any lower.”

Whether mortgage rates have bottomed will depend largely on what the RBA does with the Term Funding Facility (TFF).

The TFF was announced in March 2020 and provides low cost three-year funding for authorised deposit-taking institutions (ADIs) to support the supply of credit.

To date, the TFF has been highly successful in replacing relatively expensive wholesale funding with cheap funding from the RBA:

Then the RBA Board adjusted the TFF in response to economic conditions, expanding and extending the facility, and in November it lowered the interest rate on new drawings to only 0.10% (from 0.25%).

The TFF has successfully lowered mortgage borrowing rates, especially fixed mortgages:

Judging by what has happened in Europe, there is still a decent likelihood that fixed mortgage rates could go even lower.

The European Central Bank (ECB) began with 0.1% funding for banks in 2014. By 2016 the rate had fallen to -0.4%. And now it’s -1.0%. You read that right. The ECB will literally pay commercial banks up to 1% for every dollar they lend. 

Incredibly, the European nation with the the longest history of negative central bank rates – Denmark –  has already begun offering homeowners 20-year loans at a fixed interest rate of zero percent:

Customers at the Danish home-finance unit of Nordea Bank Abp can, as of Tuesday, get the mortgages, which will carry a lower coupon than benchmark US 10-year Treasuries. At least two other banks have since said they’ll do the same…

Back in 2012, policy makers drove their main rate below zero to defend the krone’s peg to the euro. Since then, Danish homeowners have enjoyed continuous slides in borrowing costs.

The once unthinkable notion of borrowing for two decades without paying interest comes as central bankers across the globe shy away from rate hikes.

These developments could be a harbinger of what lies ahead for Australia.

Should the RBA follow Europe’s path, we could soon have the TFF providing negative interest rates and cratering fixed mortgage rates under 2%.

Unconventional Economist
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  1. You know the day destroys the night
    Night divides the day
    Tried to run
    Tried to hide
    Break on through to the other side
    Break on through to the other side
    Break on through to the other side, yeah

  2. Homo sapien var. australis

    1. Upper primate that has learnt not to learn from their mistakes.
    2. Property speculator.

  3. The lower rates go, the worse thing are; the worse they will get.

    Lowering the cost of credit …. doesn’t actually help the economy….lowering the cost and availability of credit increases the attractiveness of automation as a means of lowering labour costs, a dynamic that is deflationary as lower wages equals lower consumption.

    (CH Smith)

    • NoodlesRomanovMEMBER

      That implies that somebody is borrowing to invest in innovation / R&D. I think we’ve beaten that out of the Australian economy where opening a barber shop that sells coffee and decorating it the same as what they were doing in Brooklyn in 2016 counts as innovation.

  4. chuckmuscleMEMBER

    This country struggles to simply remove tailwinds from property such as negative gearing, CGT exemptions and pension exemptions because of the potential to reduce the growth rate in property prices, as in slightly less positive growth rates.

    The idea that increasing rates which will almost certainly hit house prices (as the RBA explicitly acknowledged in those FOI’s released earlier this week) will be permissible is, frankly, about as likely as reintroducing lending standards (mplol). We are all bubble managers now.

    Ask yourself in all seriousness, whats more likely, Swing Lowe hiking rates to 1% in the next few years, or creating a market for 10yr fixed rate mortgages with a 2 handle?

    • Now Now, lowering rates helps businesses (and thereby the economy) to grow by;
      1. lowering the cost for them to expand, invest and innovate.
      2. when the above occurs business employ more staff, they pay existing staff more or both!
      3. As more people are employed those people purchase more goods and services and we rinse and repeat.

      The circular pattern and the results it produces are clear as day for all too see! Just look at GDP and the BRW list, growth every year!

      If you don’t understand the above you clearly haven’t availed yourself of our world leading tertiary education system nor are you having a go.

      • Christopher Kennett

        Right now small business loans cannot be guaranteed/secured by a third-party property.

        eg. Parents cannot use their house as collateral for a child’s business loan.

        This is because of responsible lending laws – it should be the first thing to change, to actually enable credit to flow to small businesses.

    • No – this country struggles to do so because it knows it would be economic suicide. We are the most indebted country per capita in the world, and most of that debt is secured against housing. If that asset falls our economy is shown for what it truly is – not an exporting country, not a mining country, not a farming country…. a debt country that has used whatever income it got to get even more debt and live beyond its means for at least the last 2 decades.

      Housing debt is what keeps our AUD high – another thing millennials typically like when they want lower house prices. They also want new car’s, overseas holidays, etc. Remember when housing was affordable many people owned used Ford’s/Holden’s and the overseas Asia/Europe treat was a rarity/expensive? When electronic goods were worth stealing from homes because they were considered pricey? You want affordable housing; the economic settings need to reset back to that where our dollar is low enough that our exports match our imports.

  5. Jumping jack flash

    ” The ECB will literally pay commercial banks up to 1% for every dollar they lend. ”

    It makes complete sense for the central banks to alleviate some of the interest burden from the people in a debt economy.
    If the people were on the hook for all the interest payable on their debt then there would be a hard limit to the amount of debt that could be doled out, and a hard limit to economic growth. The consequences of this are fairly obvious.

    At the end of the day it doesn’t really matter who pays the banks their interest, it only matters that it gets paid.

    Also keep in mind that nonproductive debt, which is the flavour of debt that our debt economy is built on, doesn’t create its own interest payments. The interest must be found from “somewhere else”. After a time, all the income from “somewhere else” that is taxed by the interest will be completely used by the interest.

    Not too sure, but this may indeed be the definition of the proclaimed “Minsky moment”.

    In order to delay that point where all productive capacity is being used to repay interest on debt, it is necessary to simply create the interest (using cheaper debt) and then use that debt to pay the interest on the people’s debt.

  6. Shades of MessinaMEMBER

    0% mortgage rates and using super balances in offset mortgage accounts are surely doable.

    The sky is the limit on house prices !!.

    • Jumping jack flash

      Around $2 trillion of super can be leveraged into a reasonable pile of debt at 95% LVR, don’t you think?

        • Jumping jack flash

          Not quite yet. We are currently seeing the effect of the smallest fraction of that, only a tiny 36 billion, and probably not even all of that amount. And look at it go as a result.

          Can you imagine what will happen if even half of the full 2 trillion of super is released?

      • adelaide_economistMEMBER

        Interestingly the mass advertising campaign on TV right now by ‘Athena’ is for cheap loans funding directly by superannuation funds. Athena isn’t a bank, as you find out when you read the fine print and they state that if they go broke, your redraw might be an issue as they aren’t an ADI. So the funnelling of super funds (outside and beyond SMSF) has well and truly begun. I am convinced the super fund of this country is too enticing to be resisted when it comes to buying time for our crazed economic system. The covid19 drawdowns were just the beginning at hacking away at it.

  7. Your timing is exceptional.

    My service delivery focused bank (ING) tried to get me to fix my mortgage today.

    Nah ,Thanks

  8. I was literally just talking to a Mate, He went to the bank to get a car loan added to his portfolio. His misses wants a New Mercedes so he asked for up to $200K… they turned around and said the government is encouraging them to increase lending and as the rate is so low they could offer up to $700K for a freaking car loan….

    admittedly he is very well off already and has a number of investment loans with them but……

      • happy valleyMEMBER

        What’s to worry about – it’s exactly the type of irresponsible lending that Frydenberg wants and he hasn’t even got his irresponsible lending regime in place. Once that happens, the $700k loan mentioned above will become $2m min overnight.

    • NoodlesRomanovMEMBER

      Why would a well-off person take out a loan for a car? There’s no tax benefit for a payg mug like me, so I’m curious why he’d want to get a loan for a non productive asset that is guaranteed to depreciate by 20% in a month.

      • Cash flow, has a huge monthly cash flow that ebbs and flows somewhat. Also asking for this loan allowed him to ask for a rate cut on all his investment properties. Rate on the car loan is so low it effectively becomes negative when the 0.5% drop on all his other investment loans is taken into account.

        Tax advantages are not the only reasons for doing things…