A Reserve Bank program that gave banks $188 billion to provide ultra-cheap home loans at the height of the Covid lockdowns appears to be playing a key role in Australia’s cost of living crisis.
And now many borrowers are facing a serious ‘cliff’ in the coming months – with mortgage holders who took out a very low fixed rate loan two years ago facing an abrupt 69 percent increase in their monthly repayments.
Mark Bouris, the founder of Wizard Home Loans who is now executive chairman of Yellow Brick Road, said the RBA’s pandemic intervention was bound to cause problems later on.
In 2020 and 2021, Australian banks were borrowed $188 billion to provide historically cheap home loans. The Commonwealth Bank was allocated $51.14 billion of that, compared to $31.87 billion from NAB, $29.78 billion from Westpac and $20.09 billion from ANZ.
The RBA policy – dubbed the Term Funding Facility – meant that by May 2021, the Big Four banks were offering average fixed rate loans of just 1.92 percent.
A third, or 35 per cent, of Australian home borrowers paid off their loan – a level much higher than the usual 15 per cent. In July and August 2021, 46 percent of new loans were fixed-rate products.
Eliza Owen, head of research at CoreLogic, said the real pain would start in April as ultra-low fixed rates expired, likely driving home prices down further.
The average house price in Sydney has already fallen by 15 percent in the past year to $ 1.2 million.
The Reserve Bank of Australia under Governor Philip Lowe lent $188 billion to the banks as part of its Term Funding Facility – leading to ultra-low fixed rate mortgages
“As more fixed loans revert to variable rates, there will likely be a challenge to usability,” said Ms Owen.
An increase in distressed sales could also put additional downward pressure on property values.
‘If people are forced to sell their homes in a falling market, there is an additional risk that the mortgage debt cannot be recovered from the sale of a home.’
Mr Bouris said the RBA’s Term Funding Facility is now contributing to Australia’s inflation crisis.
“During the pandemic, the RBA advanced our banks’ money at a rate I’ve never seen in 40 years, 0.1 percent,” he said in an op-ed for News Corp.
“About $188 billion was advanced to the big banks to lend to them.
Mark Bouris (pictured right with model Monika Radulovic), the founder of Wizard Home Loans who is now executive chairman of Yellow Brick Road, said the RBA’s Term Funding Facility was sure to cause problems later on
“The banks took it and tried to make as much margin as possible by lending it to consumers at very low interest rates.
RateCity research director Sally Tindall said in hindsight the RBA may have gone too far with its Term Funding Facility, leading to a situation where ultra-low fixed rates expire in 2023
“The repayments were cheap, which allowed us to pay more money to buy real estate, which had an inflation factor attached to it.”
The Reserve Bank expects 880,000 ultra-low fixed rates to expire in 2023, which could cause monthly mortgage payments to jump abruptly by 69 percent.
That’s because the fine print in the fixed loan contract stipulated that this borrower would move to a “payback” variable rate that was 3.33 percentage points higher than the existing cash rate, RateCity revealed.
Westpac, ANZ and NAB now expect the Reserve Bank to raise rates three more times – in March, April and May – to an 11-year high of 4.1 percent.
This would cause borrowers with an ultra-low fixed rate of 1.92 percent to abruptly move to a standard floating rate of 7.43 percent.
A borrower with an average $600,000 mortgage, with a 25-year term, would go from $2,518 a month to $4,251 — a massive 68.8 percent increase that can only be met by refinancing a bank loan.
The Commonwealth Bank was allocated $51.14 billion of that, compared to NAB’s $31.87 billion, Westpac’s $29.78 billion and ANZ’s $20.09 billion
RateCity research director Sally Tindall said the RBA may have gone too far with its Term Funding Facility in retrospect, leading to a tricky situation in 2023 with ultra-low fixed rates expiring.
Fixed-rate mortgage cliff approaches as repayments rise 69%
$500,000: $1,444 up to $3,543 from $2,099
$600,000: $1,733 up to $4,251 from $2,518
$700,000: $2,022 up to $4,960 from $2,938
$800,000: $2,304 up to $5,662 from $3,358
$900,000: $2,592 up to $6,370 from $3,778
$1,000,000: $2,881 up to $7,078 from $4,197
The repayment increases reflect the borrower, with a 25-year loan, taking out a fixed rate of 1.92 percent in May 2021 and going straight to a floating rate of 7.41 percent to 7.43 percent in May 2023. That is based on the Reserve Bank cash interest rate rises three more times to 4.1 percent. Fixed-rate contracts had fine print explaining that borrowers would transfer to a rate 3.33 percent above the RBA money rate. Repayment rates at the Big Four banks are said to be 7.41 percent on loans over $750,000
“They have taken out insurance, which in hindsight may have taken out too much insurance and the term finance facility decisions are part of that,” she told Daily Mail Australia.
Yes, they helped the banks fund these ultra-low rates and as a result you have a significant portion of borrowers who are now facing major loan repayment jumps.
“Without a crystal ball, people can’t get these things quite right.”
In addition, the federal government has spent $300 billion on social measures such as JobKeeper and boosting unemployment benefits for JobSeeker.
Mr Bouris said an increase in money supply during the early phase of the pandemic had exacerbated inflation, with Australians having more money to spend after the lockdowns ended.
“The increase in money supply that occurred from 2020 to 2022 was one of the most extraordinary in our economic history, due to extraordinary circumstances,” he said.
The Reserve Bank and the government created this inflation, but guess who is being punished for it? We, the consumers.’
But Ms Tindall said the ultra-low rates funded by the RBA’s Term Funding Facility gave borrowers a cushion to deal with the cost-of-living crisis.
“It’s helped a lot of families, not just through the Covid crisis, but taking advantage of those ultra-low rates,” she said.
“A lot of people throw money away while the sun is shining.”
The worst inflation in 32 years has led the RBA to raise interest rates nine times in nine months, pushing cash rates to a 10-year high of 3.35 percent.
The cost-of-living crisis is now so bad that a 3.3 percent increase in wages, the fastest in a decade, translates into a record fall in real wages as inflation of 7.8 percent slows wage increases in it doesn’t fall.
To make matters worse, two thirds of Australia’s fixed rate loans will mature in 2023, meaning 23 per cent of all home borrowers will come from ultra-low rates.
“Hence the ‘cliff,'” Mrs. Owen said.
A borrower with a 20 percent down payment is in a better position to negotiate once the fixed rate ends.
An Australian with an average of $600,000 can negotiate to move to a variable rate of 5.5 percent when their fixed period is up.
RateCity calculated that monthly repayments would increase 42.7 percent to $3,592 from $2,518 instead of 68.8 percent to $4,251.