Mortgage market at ‘inflection point’ as banks look to lock in loans

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The mortgage market faces a turning point, experts say, as new fixed mortgage rates have stayed below variable rates for several months and predictions grow that the cash rate has peaked.

National Australia Bank and Westpac last week became the latest banks to reduce some of their fixed rates, with both lenders dropping certain two-year rates, following cuts from the Commonwealth Bank in August.

For the first time since January last year, the average fixed rate dipped below the average variable rate in May.Credit: AFR

Chief executive of mortgage broker Finspo, Angus Gilfillan, said new fixed interest rates had crossed a pivotal threshold, dipping below new variable rates for the first time since January 2022.

“The current situation suggests an inflection point, where the market no longer expects interest rate rises to occur in the medium term,” he said.

While the average new variable rate has increased 2.5 percentage points to 5.95 per cent over the past year – exceeding the 1.75 percentage point increase in the Reserve Bank cash rate over the same period – Gilfillan said average new fixed rates increased by a more modest 1.7 percentage points to 5.8 per cent.

Fixed rates, which have traditionally played a small part in Australia’s home loan market, tend to reflect the money market’s view on the future path of the cash rate.

“Fixed rates are historically higher than variable rates when rate hikes are expected on the horizon,” Gilfillan said.

Some economists have called a peak in the Reserve Bank’s cash rate, forecasting a fall as early as March. While some fixed rates have fallen lately, RateCity figures still show the majority of recent fixed-rate changes have been increases.

RateCity research director Sally Tindall said the major banks’ reductions recently could be an early sign some fixed rates are on their way down. At the same time, banks have been trying to rein in some of the more aggressive discounts they are offering on variable-rate loans, and Tindall said none of the big four banks had an advertised variable rate under 6 per cent.

Westpac last week raised one of its advertised variable rates for new customers, and Tindall said this was the 22nd rise to new customer rates from a big four bank since March. She said this trend showed “a strategic move to walk away from the cut-throat competition in the home loan market”.

She said it was unlikely that variable rates among the big four would return below 6 per cent until the Reserve Bank began cutting the cash rate.

As banks raised their variable rates, the number of customers choosing to fix their home loans has risen, albeit from low levels. Gilfillan said the proportion of customers choosing fixed rates had doubled over the past three months to 9.4 per cent in July, although it remains below the peak of 46 per cent in July 2021 when banks were offering ultra-low fixed rates.

Morningstar analyst Nathan Zaia said banks may have lowered their fixed rates recently to attract customers who were coming to the end of their previous fixed-rate contracts.

“The banks are probably looking for a way to lock their customers in, at least for a few years,” he said, as the mortgage rate cliff plays out.

Banks have signalled their intentions to walk away from cut-throat competition in the past few months in an effort to protect their margins, and have been less generous in some of the discounts they are offering customers on variable-rate loans.

“The banks are still offering very competitive pricing, but they’re not competing as hard,” Zaia said.

Once banks have made their repayments to a pandemic-era RBA funding program called the term funding facility (TFF), Zaia said the intensity of competition would probably fade.

“If the cash rate starts falling, they may not pass all the decreases on to borrowers,” he said. “Once they’re past the TFF repayments, banks will have more flexibility and there’s really little incentive for them to compete hard.”

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