Goodbye TFF, goodbye supercheap mortgages

The RBA is nowhere near tightening monetary policy. The major reason is that unemployment is still far too high and wages plus inflation far too low. To get those prices up the RBA will keep the pedal to the metal.

Or will it? Actually, no. Another reason why we won’t see any kind of move in the cash rate in the foreseeable future is that real mortgage rates are about to rise. Indeed they already are. Why?

Westpac has more:

What happens once the TFF is no longer available? The market is very interested in how quickly the ADI community can shift its funding mix.

As mentioned, there is still $90bn or so to be drawdown from the TFF before 30 June. That is obviously a significant chunk of funding, and when it ceases operation. the facility will have provided the ADI community with almost $200bn of funding over the past 15 months. At the same time, deposits as a percentage of the funding mix are higher than prepandemic. The impact of this on other sources of funds are well known. For example the top chart below shows how few forays into international markets have been undertaken by Australia’s major banks over this period, which the bottom chart also shows that domestic issuance has suffered similarly. The chart also give us some insights into how previous years funding has evolved over the second half of the calendar year. Since 2016, July and August have seen both offshore and domestic issuance surge, before slowing into a large surge in November. The market is anticipating a similar profile, with pent-up investor demand for domestic paper likely to be satisfied quickly. The XCCY term structure has also already steepened up to reflect those risk rewards and it is not clear that Kangaroo issuance into year end will be sufficient to cap any further spread widening.

To cut a long story short, the TFF is the emergency funding facility deployed by the RBA during the March 2020 COVID crash to prevent banks from experiencing a credit crunch as global credit market froze up.

It offered banks next-to-free (0.1%) money in place of existing bonds that were much more expensive. The term of this free money was three years. That is why the banks have been offering radically discounted three-year fixed-rate mortgages to supercharge house prices.

But the TFF is now going to wind up. So, the banks will then have to refinance that next-to-free money with higher-yielding bonds again. All of those super-cheap fixed-rate mortgages are going to disappear.

Indeed, they already are at the longer end of the term:

  • CBA hiked 4-year fixed-term loans by 20bps in March.
  • Further rises are ahead.

There is also the implicit (and quite a large tightening) as the fixed-term loans roll off and revert to much higher floating rates (around a 50% hike in real repayments). This will begin in earnest in 18 months.

On top of that, we have APRA ready (for want of a better term) to use macroprudential tools as investors chase capital gains in the overheated property market.

All of these are going to land during a period when Australian terms of trade are collapsing as China slows thanks to its renewed deleveraging push, which will hammer wages as national income craters.

There is no RBA move on the cash rate in sight.

Houses and Holes
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  1. The RBA do not think the currently overheating property market is a threat to financial stability therefore they are not close to using macro pru. At a recent meeting I asked what would it take to bring in LVR limits? Their response – ‘a serious deterioration in lending standards’

    • The Traveling Wilbur

      We’re all perfectly safe then. Excellent!

      Since it would be a physical impossibility for lending standards to be any lower than they already are.

    • What does this mean in real terms? Since we don’t have actual regulators in this country – just shop fronts – after a crash it will be deemed that lending standards were allowed to get too low.

      Australia’s advanced circular economy

  2. TFF will be back, just with a different name. The whole politico housing complex wants low rates and it will be delivered.

  3. What does this mean in real terms? Since we don’t have actual regulators in this country – just shop fronts – after a crash it will be deemed that lending standards were allowed to get too low.

  4. kannigetMEMBER

    So… they have had access to $200bn in which to allow them to loan like drunken sailors and still have 45% of the available money left with only 1 month to go… They obviously didn’t loan hard enough and look at what has happened with prices….

    Nucking Futs.

    • Jumping jack flash

      “They obviously didn’t loan hard enough…”

      Indeed, a travesty!

      They should be whipped. Now look at what’s happening!
      Like typical government funding, had they used up all the money their glorious masters would have thought “gee, look its all gone, they really must have needed it then! Here have some more.”

      But since they only used a bit over half their glorious masters obviously thought it isn’t needed and everything is fine and dandy.

    • The housing market is quite small. It doesn’t take much demand increase to cause price rises. Very little of the housing stock is traded at any one time. Lots of money chasing only a few marginal houses.

  5. Beat Le Mania

    Big deal, though, if banks are refinancing at even 2% higher. I remember the still intense heat in the property market back in the first decade of this century while mortgage rates were nudging up to 8%. It’s all FOMO.

    • 8% interest rate on $300k loan ($500k house) vs 4% (+2%) interest rate on $1mil loan ($1.5mil house)

    • Yeah but bigger mortgages today will require bigger repayments…but I don’t think rates are rising anytime soon

      • kannigetMEMBER

        Based on the past behaviour of the RBA, ASIC and Gov triangle of economic incompetance it is hard to see them raising rates.

        But, they may not have any say in the matter. If rates worldwide start to climb and we start importing inflation the banks may have to raise rates due to funding requirements. Either that or the RBA creates a permanent TFF of unlimited size….

        • There’s no “either that or…”
          There’s only “the RBA creates a permanent TFF of unlimited size”
          Their motto is “whateva it takes!”

        • working class hamMEMBER

          Letting the RE market work itself out is not how good economic managers operate.
          TFF mark II or Scomo goes down with the ship.

        • I’m moving to 1.89% 2 year fixed, current lender Mortgage House offered me 1.69% variable to stay, although I’m 50% LVR, still these rates are excellent.

  6. I thought APRA had recently made statements that it saw no unusual risks in lending markets? Suggesting that macro prudential is a long way off?

  7. Jumping jack flash

    There’s a couple of angles to look at this.
    The first angle is “oh noes the TFF is gone and now interest rates will go up! The horror!”

    The second angle is it won’t be necessary to have low interest rates once CPI and then wage inflation kicks in. And looking around the world it is fairly obvious this is what they’re all pushing for. Except Australia. We’re a little slower than the others, it must be all the sun and the relaxed lifestyle.

    All it will mean is the required amount of CPI will be higher, and the amount of wage inflation will need to be higher, to inflate the debt away, at whatever price the debt becomes.

    We didn’t have low rates in the early to mid 00s and look at the house price growth!
    The difference was we had a healthy spurt of wage inflation, and decent CPI over the same period, that is until everyone panicked around the end of 2007.

    • “The difference was we had a healthy spurt of wage inflation, and decent CPI over the same period, that is until everyone panicked around the end of 2007.”
      At the turn of the century, workers in Australia were being paid half the salary of those in UK or USA doing the same job. Wages in Australia rose steadily until 2013, at which point they reached parity with UK and USA. After that, they stopped rising, and here we are in 2021.

  8. Certificate 1 in Real Estate, Property Economics 1001.
    Wilson’s law
    Low interest rates = higher property prices
    Increased interest rates = higher property prices
    Increased immigration = higher property prices
    Share market up = higher property prices
    Share market down = higher property prices
    No immigration = higher property prices
    High AUD = higher property prices
    Low AUD = higher property prices
    Low supply = higher property prices
    Increase supply = higher property prices
    Lower interest rates = higher property prices
    Higher interest rates = higher property prices
    Good times = higher property prices
    Bad times = higher property prices
    Armageddon = highest ever property prices

    • seems to me that “higher House prices” is really just the way that John Q Public expresses their belief about the long term value of alternative Australian Asset classes.
      By this reasoning, the true cause of our insane house prices lies in our inability to create new highly valued assets, (especially our inability to create asset classes that do not derive their value from land or RE prices).
      If Australians truly wanted to invest we’d invest in our kids by creating new high value businesses and thereby sustainable skilled employment opportunities for our kids.
      It’s sad that we clearly don’t trust the next generation to create businesses that will prosper in the second half of the 21st century, instead of investing in education/ skills and businesses we borrow heavily so that we can speculate on 50 year old fibro shacks, it’s so sad!

    • The Traveling Wilbur

      Yeah! Giggled when I read that above. I don’t think he’s trademarked that one yet so if you move fast it’s all yours. 😀