Households warned to expect more out-of-cycle rate rises

From The NewDaily.

A figure deep in the Commonwealth Bank’s latest billion-dollar result heralds more rate pain for indebted households in 2017, even if the Reserve Bank doesn’t touch the cash rate.

Australians who can afford it are saving like crazy for fear the big banks will keep hiking mortgage rates. And it seems they are right to be worried, as rising wholesale and regulatory costs tempt lenders to claw back funds from owner-occupiers.

On Wednesday, CBA posted a half-year (July-Dec) net profit after tax of $4.89 billion.

But its net interest margin (NIM) – the difference between what the bank pays for funding and what it charges on loans – fell to 2.11 per cent in the first half of the 2017 financial year, down from 2.14 per cent in the full 2016 fiscal year.

Add in the requirement from regulator APRA that banks hold more capital to protect against a crisis and there are strong signs that borrowers will soon be slugged.

Finance analyst Martin North said he expected the big lenders to continue lifting rates this year, even if the RBA cash rate stayed at a record-low 1.5 per cent.

“The real conversation here is not what the RBA does because the official cash rate has very little to do with what real mortgage holders are experiencing. We have already seen, and we will see more, out-of-cycle interest rate rises,” Mr North told The New Daily.

Much of the recent media focus has been on a crackdown by CBA and its subsidiary, BankWest, on investor lending. CBA slammed on the brakes even harder on Wednesday by lifting its interest-only home loan rate, targeted at investors, by 12 basis points to 5.68 per cent.

The average Australian may rejoice at this, as many believe investors squeeze out first home buyers.

The fear, however, is that the big banks, deterred by the regulator from writing too many investor loans and forced by competitive pressures to leave deposit rates alone, will target owner-occupiers for what Mr North called “margin repair”.

fixed variable ratesAs the chart above shows, fixed and variable rates have been pushed very low by the Reserve Bank’s heavy cuts to the official cash rate in recent years, intended to stoke the economy during the post-GFC slump.

But if readers look closely at the bottom right of the chart, they’ll see rates are trending up.

Data supplied to The New Daily by RateCity shows that while the average variable rate at the big four banks crept up by only one basis point over the last six months, the average fixed rate is now six basis points higher than in September last year.

The bigger concern for Australians is rising variable rates. About 85 per cent of current borrowers are on variable, which means any rise will hit their household budgets immediately.

owner occupier ratesIn a recent research note, JP Morgan identified rising mortgage servicing costs as the “most immediate challenge” facing Australian households.

The bank also noted that households seem to be stockpiling a “handy cash buffer” in their bank accounts “to help insulate against unexpected income and liquidity shocks”.

But Mr North noted that not all households are so well prepared.

“There are some households who are very well protected because they’ve been repaying more than they needed to on their mortgages when interest rates dropped and they’ve been saving more,” he said.

“But there are other households that are actually up to their gills in debt and have no ability to effectively make those forward bets on the market.

“And it’s not just battlers on the outskirts of cities. There are some younger, more affluent people who have bought high-rise apartments quite recently who’ve got really large mortgages and are highly leveraged and have got almost no other assets.”

household savings relative to debt

Watch the central banks

The excuse from the big lenders is that it is getting more expensive to borrow wholesale funds from overseas.

Despite what readers may have heard, the Reserve Bank’s official cash rate – the one it announces with much fanfare on the first Tuesday of every month except January – is not the only impact on the cost of lending.

This was demonstrated in a soon-to-be-published, five-year study by Australian academics Drs Simon Cottrell and Sigitas Karpavicius, a draft of which has been provided to The New Daily.

Using a sample of 1711 bond issues in five currencies by Australia’s big four banks, the academics found that the cost of wholesale funding (which contributes about 40-50 per cent of the total funding of banks) is mainly driven by international monetary policy, while the impact of the RBA’s cash rate is “insignificant”.

The US Federal Reserve is starting to lift rates, and other important central banks may soon follow, which means wholesale funding costs will continue to rise, if this study is correct.

So the big lenders have a good excuse to push up rates outside of the RBA cash rate – and households have good reason to be worried.

US Mortgage Rates On The Up Again

From Mortgage Daily News.

US Mortgage rates moved higher for the 4th straight day today, following Fed Chair Janet Yellen’s congressional testimony.  It wasn’t that Yellen’s speech or Q&A contained any major surprises.  Rather, bond markets (which dictate rates) were simply looking for some indication of “sooner vs later” with respect to the Fed’s next rate hike.  Her comments were generally more in line with “sooner.”  Bond markets responded by quickly trading rates to higher levels, resulting in multiple “negative reprices” for mortgage lenders this morning.

Bonds calmed down in the afternoon, and ended up clawing back roughly half of the morning’s losses by the end of the day.  Many lenders were consequently able to offer “positive reprices”–bringing rate sheets part of the way back to yesterday’s levels.

Despite the afternoon improvements, essentially every lender is in worse shape today vs yesterday.  The average top tier conventional 30yr fixed quote is back up to 4.25%–a move that was already in-progress yesterday.  Today’s rates are the highest since February 3rd.

US Mortgage Rates Move Higher, Again

From Mortgage Rate Newsletter.

Mortgage rates moved higher for the 5th time in the past 6 business days.  The past 2 days have combined to bring rates a full .125% higher.  That’s the increment by which rates are most commonly divided (i.e. 4.0, 4.125%, 4.25%, etc.).  Under normal circumstances rates might move that much over 2 weeks as opposed to 2 days.  In fact, it happened twice in this most recent cycle (Jan 18/19, and Jan 24/25).  The only time we see rates moving any faster is during major blowouts like the weeks following the election or the 2013 taper tantrum.

The average lender is once-again quoting 4.25% on top tier conventional 30yr fixed scenarios.  This isn’t the first time we’ve seen 4.25% this year, but closing costs are slightly higher today.  That means effective rates are at 2017 highs.  Several lenders are already up to 4.375% and a scant few remain at 4.125%.

In the bigger picture, the recent weakness suggests a trend toward higher rates is taking shape after markets paused and corrected heading into mid-January.  This trend would have its most severe implications if rates break above mid-December’s highs, and it’s safest to assume that’s where we’re headed until/unless we see a big shift in the other direction.  Bottom line: early January was a nice break in the storm.  We knew the move toward lower rates would run out of steam at some point before retracing too many of the steps taken in late 2016.  The past few days increasingly confirm that break is over.

Home loan rates heading higher as funding costs rise, competition eases

From The Australian Financial Review.

Mortgage rates are set to rise for both fixed and variable rate borrowers this year as global interest rates shoot higher, competition eases and capital rules begin to bite.

“Borrowers should assume we are at the bottom of the interest rate cycle – in fact we are probably already past it,” housing finance expert Martin North of Digital Finance Analytics told The Australian Financial Review.

Australia’s banks have cited higher funding costs as a reason for increasing fixed-rate home loans. On Monday National Australia Bank became the last of the big four banks to lift fixed-rate loans in recent months, citing higher funding costs as it raised rates on two, three and four-year mortgages.

The main cause of these higher funding costs for fixed-rate loans was a sharp rise in Australian medium-term bond rates from September to December as rising commodity prices, rising inflation and a shift in global monetary policy rhetoric forced traders to question the thesis that rates would stay low indefinitely.

Bond rates kicked up again following the election of Donald Trump in the US, forcing the three-year Australian swap rate to 2.35 per cent from an all-time low of 1.75 per cent in September. Australian interest rates rates tend to closely track movements in global bond rates and are expected to rise further this year, which will force costs higher for prospective borrowers seeking a fixed interest rate.

“Capital markets have seen a price hike since Trump, and as a result banks are having to pay more for wholesale funding – a critical element in bank funding,” Mr North said.

While rates on standard variable mortgage loans are not impacted by medium-term moves in the bond market, they too could edge higher this year if traders’ bets that the Reserve Bank is more likely to hike than lower interest rates prove correct.

For most of last year bond markets had priced in cuts for this year, but as global bond rates have shot higher rate cuts have all been but priced out – with markets prescribing just a one in 13 chance that the cash rate will fall this year. Meanwhile, traders are attaching a one in three probability that the Reserve Bank will raise the cash rate to 1.75 per cent before the end of the year.

Mr North said the global outlook and initial indications of the policy stance of new Reserve Bank governor Phil Lowe mean rate reductions appear unlikely.

“It depends on the Reserve Bank’s view on inflation versus property [risks from lower rates],” Mr North said. “Investment loans are hot, so I think it’s an even bet as to whether they raise rates.”

Australian Bureau of Statistics figures released on Tuesday showed mortgage lending to investors, which has concerned regulators, jumped by 4.9 per cent in November, up from 1.5 per cent in October – to the highest level since July 2015.

While base interest rates are likely to have the largest bearing on borrowing costs, other factors such as wholesale and deposit funding costs and capital requirements, and the level and intensity of competition among the banks for new loans will influence mortgage rates too.

Mr North, however, said that the signs are that competition pressures are easing, which will remove the downward pressure on home loan rates evident last year.

“The banks have realised that the deep discounting we saw in 2016 was a race to the bottom, so the banks are going to be sassier from here and that means higher rates,” he said.

Another potential upward force is the chance of further increases in capital when the Basel committee on banking supervision finalises its Basel III capital framework.

Mr North said this year will be characterised by differentiated pricing between customers with low risk, ‘low loan to value’ borrowers, that is, those who have a higher deposit, receiving favourable rates while riskier ‘high loan to value’ borrowers will pay more.

“The thing about Basel is it’s translating more of the portfolio risks into capital calculations so different types of borrowers attract different charges,” he said.

One positive for borrowers is that two important components of bank funding costs have moderated.

Concerns have been raised that banking rules that come into effect in early 2018 and prioritise retail deposits over other forms of funding will increase competition for savings, forcing up deposit costs. From January next year Australia’s banks will have to meet a prescribed ‘net stable funding ratio’ aimed at limiting the risk of a bank run by funding their loans with stable sources such as deposits.

So far, however, the evidence is that banks are not competing aggressively for savings, by increasing term deposit rates, as they were six months ago.

Analysis compiled by Deutsche Bank this week shows that deposit margins, measured as a spread over the bank bill rate, had declined significantly from August, when they rose to about 0.40 percentage points over the bank rate to below 0.20 percentage points. Online saving rates have also declined in recent weeks.

“While deposits remain a headwind to margins, these trends illustrate the continuing easing of deposit spread pressures,” Deutsche analyst Andrew Triggs wrote.

Wholesale bank funding costs, as measured by credit spreads, also appear to have moderated despite significant market uncertainty.

The cost of insuring against the default of a major Australian bank’s debt for five years is now around 64 basis points, its lowest level for 18 months, and well below the 10-year average of 100 basis points. Australian bank credit default swaps are a proxy for wholesale funding costs.

NAB Re-balances Mortgage Rates

NAB today has announced changes to its home loan fixed rates.

From today, NAB will decrease its 1 year Package Fixed Rate for Home Loans to a highly competitive rate of 3.89% per annum for owner occupiers. NAB will also decrease its 1 year Package Fixed Rate for Residential Investment Home Loans to 3.99% per annum.

Meanwhile, NAB’s 2, 3 and 4 year Package Fixed Rate for Home Loans will increase effective today, to 3.98%, 4.09%, and 4.59% per annum respectively; and 2, 3, 4 and 5 year Package Fixed Rate for Residential Investment Home Loans will change to 4.19%, 4.29%, 4.79%, and 4.79% per annum respectively.

“There are a range of factors that influence the funding that NAB – and all Australian banks – source, so we can provide home loans to our customers,” NAB Chief Operating Officer, Antony Cahill, said.

“The cost of providing our fixed rate home loans has increased over recent months.”

“We continue to watch market and economic conditions to ensure we continue to lend and manage our business responsibly, so we remain strong and stable for the benefit of our customers, shareholders, and the broader economy,” Mr Cahill said.

Today’s decision applies to new fixed rate home loans only. NAB continues to closely monitor the various factors that influence its Variable Rate for Home Loans (Standard Variable Rate) for owner occupier customers, which remains at 5.25% per annum at this time.

Mr Cahill said NAB’s fixed rate home loans remain highly competitive – especially with today’s new one year rates.

“We know that fixed rate home loans have become increasingly popular with our customers. We saw these applications more than double as a share of total applications in December, compared to in September last year,” Mr Cahill said.

Customers who want to have certainty about their monthly repayments should speak with their banker or broker to find out more about what’s available, and if a fixed rate home loan might be right for their circumstances. Conditions, fees and eligibility criteria apply to NAB’s products.

NAB will also change NAB Homeplus Fixed Indicator Rates, available through NAB Broker, as stated above.


Advertised Fixed Rates for NAB Tailored Home Loan (Choice Package)

Principal and Interest Interest Only
New Rate Old Rate New Rate Old Rate
1 year 3.89% p.a. 3.99% p.a. 3.89% p.a. 4.09% p.a.
2 years 3.98% p.a. 3.75% p.a. 3.98% p.a. 3.85% p.a.
3 years 4.09% p.a. 3.89% p.a. 4.09% p.a. 3.89% p.a.
4 years 4.59% p.a. 3.99% p.a. 4.59% p.a. 3.99% p.a.
5 years 4.59% p.a. 4.59% p.a. 4.59% p.a. 4.69% p.a.


Advertised Fixed Rates for NAB Tailored Home Loan (Choice Package) – Residential Investment

Principal and Interest Interest Only
New Rate Old Rate New Rate Old Rate
1 year 3.99% p.a. 4.14% p.a. 3.99% p.a. 4.24% p.a.
2 years 4.19% p.a. 3.90% p.a. 4.19% p.a. 4.00% p.a.
3 years 4.29% p.a. 3.89% p.a. 4.29% p.a. 3.89% p.a.
4 years 4.79% p.a. 3.99% p.a. 4.79% p.a. 3.99% p.a.
5 years 4.79% p.a.


Mortgage Rates Go Higher

From Australian Broker.

The number of fixed rate mortgages offering rates of less than 4% is trending downwards thanks to recent rate hikes by a large number of major and non-major banks.

The recent Rates of the Nation report by found there were now 525 fixed home loan products offering an interest rate of less than 4%. This was down by 98 throughout the December quarter.

“The ‘Under 4 Club’ for fixed rates contracted by 15% over the quarter; that’s around 100 fewer sub-4 per cent fixed rates on offer now compared to three months ago,” Peter Arnold, data insights director for, said.

This shift saw an increase in the demand for fixed mortgages by close to 30% at the end of 2016, he added.

This means that for brokers, conversations with borrowers around fixed rates will be quite different, Arnold told Australian Broker.

“Now there’s a higher chance than at any point in the last five years that the great rate that you’ve got will disappear before the loan gets funded so managing borrower expectations around that and considering rate locks is appropriate.”

He also suggested reassuring borrowers that although rates have increased by 10 or 20 basis points, levels still are at historic lows.

“If you look at the changes, we hope that won’t be enough to change whether someone will actually get a loan. Most brokers will probably be pretty comfortable with that but for a lot of borrowers that’s probably a big factor on their mind.”

At present, the majority of fixed rates lie between 3.8% and 4.6% while for variables, this is slightly higher between 3.8% and 4.8%.

The average rates for longer-term fixed mortgages are now higher than variable rates. This shows that the banks expect further rate rises in the foreseeable future.

For owner-occupiers, the gap between the average home loan rate and the lowest home loan rate has remained steady at 0.98% since September last year.

This was one of the more surprising results of the report, Arnold told Australian Broker, given the level of activity in the second half of last quarter.

“From mid-November onwards, out of the 105 lenders that we track, we’ve seen at least two thirds of those lenders increase at least some of those fixed rates.”

While it was unusual to see this much movement without an RBA cash rate change, Arnold said that the current state of play was a massive decoupling of home loan rates and the RBA.

“We’re seeing lenders raise and also decrease their offers whenever they see fit from a competitive or funding point of view, and we’re seeing a lot of good deals released daily and ending daily as well.”

For investors, the gap between average and lowest rates increased from 0.88% to 0.91% from September 2016 to January 2017.

LVR pricing has also shifted over the past 24 months. The largest movement was for loans available to borrowers with a 5% deposit which dropped from 61% of all mortgage products to 50%.

Looking ahead to the rest of the year, Arnold said consumers should expect even more rate rises on the horizon.

“It’s unlikely that we’ll see rates return to the long term average of around 7% just yet, but competition at the low-rate end of the market is slowing.”

He also predicted that lenders will undergo a full repricing to bring fixed rates more in line with variables. One reason behind this was since fixed rates have been significantly below variable rates for a while.

“I’d expect it would be more of a levelling out of fixed and variable rather than the shorter-term fixed ones sitting much higher than variables.”


A Cumulative View Of Mortgage Rate Sensitivity

We had significant interest in our recent posts on mortgage rate sensitivity in a rising market. One recurring request was for a cumulative view of rate sensitivity. So today we post these views on a segmented basis, using our master household segmentation.

A quick recap, we updated our analysis of how sensitive households with an owner occupied mortgage are to an interest rate rise, using data from our household surveys. This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into pay, and as regulators bear down on lending standards.

To complete this analysis we examine how much headroom households have to rising rates, taking account of their income, size of mortgage, whether they have paid ahead, and other financial commitments. We then run scenarios across the data, until they trip the mortgage stress threshold.

At this level, they will be in difficulty.  The chart shows the relative distribution of borrowing households, by number. So, around 20% would have difficulty with even a rise of less than 0.5%, whilst an additional 4% would be troubled by a rise between 0.5% and 1%, and so on. Around 35% could cope with even a full 7% rise.

The chart below shows a segment view of this sensitivity. We add the score for each interest rate band. Young Affluent households are most sensitive to rate rises, thanks to large mortgages and static incomes. Young Growing Families are not far behind, but their household budgets are quite different. Other segments are more resilient, though a proportion of Exclusive Professionals are also highly leveraged. This first view takes account only of the owner occupied mortgages.

We can also overlay investment mortgages, and this changes the picture somewhat, when combined with owner occupied statistics. We see that the extra commitments have lifted the rate sensitivity, for example moving Exclusive Professionals from 36% to 54% exposed to a small rate increase.

Overall we see that some households really have very little headroom to cope with rising rates, a symptom of high household indebtedness.  Others are well protected and are also paying ahead.

Suncorp Lifts OO Mortgage Rates

From Australian Broker.

Suncorp has announced an increase of 0.15% p.a. for its variable interest rates on new and existing owner-occupier loans from 23 January.

The changes apply to the bank’s Back to Basics and Standard Variable products, bringing the rates up to 4.97% p.a. and 5.55% p.a. respectively.

Suncorp has also increased its small business rates by 0.15% p.a. with the Business Essentials rate moving to 5.14% p.a.

The decision to increase rates was a result of balancing the needs of stakeholders, Suncorp banking & wealth CEO David Carter said.

“Increasing competition for quality funding sources, the cost of meeting regulatory change and events overseas that have altered the outlook for interest rates globally, have led to rising funding costs.”

He stressed that the majority of bank funding was dependent on these factors instead of the Reserve Bank of Australia cash rate. Rising costs have been driven by changes in regulation to bring in a stronger banking system, he added.

“While we have been absorbing these increasing costs, it’s evident that the trend is not likely to change. These factors are also impacting the broader industry, with many of our competitors implementing similar rate changes.

“We will also reverse recent reductions to interest rates on our 55 Plus Accounts, resulting in a 0.15% p.a. increase to our middle and top rate tiers. These accounts are typically used by pensioners and self-funded retirees.”