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Cheap funding may have hit its limit

Cheap funding is fuelling record-low mortgage rates, but the discounts may have reached their lowest levels.

While the five-year swap rate is down to just over three per cent, Credit Suisse believes there is little reason for bond yields to fall any further.

“We have just lowered our bond forecast in the US for a three per cent yield by year end,” Credit Suisse’s equity strategist Hasan Tevfik said.

“It is going to be quite hard to get to those levels,” Mr Tevfik said.

“As long as the ECB is spooning out money, the Bank of Japan is spooning out money, the Fed is not even talking about rate rises this year,” he said. “So let’s treat that as the cap.

“Unless we go into a significant downturn – which is not our forecast – there is little reason for bond yields to fall further from here.

“So maybe this is the lowest cost of financing we are going to see this cycle.”

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Over the last financial year, lenders have been locking in cheap funding and slashing their mortgage rates in an attempt to gain market share.

However, with record-low rates there is the danger of brokers churning mortgages as borrowers look to refinance, according to industry stalwart Kym Dalton.

Speaking to Mortgage Business, Mr Dalton compared the current lending environment to the refinance boom in the US earlier in the year.

“I have spent a fair bit of time in North America and a feature of the market there was obviously the refinance boom when interest rates dropped,” he said.

“Right now in Australia, with this mini US-style refinance boom, retention is just not at the top of the agenda.”

The latest AFG Mortgage Index reveals an increase in refinancing in the 12 months to July.

Of all mortgages sold by AFG last month, 36.1 per cent were refinance, up from 35.2 per cent from July last year.

However, of all major bank loans written through AFG last month, 67.9 per cent were refinancing, while the non-majors accounted for 32.1 per cent in refinanced home loans.

Australian borrowers have traditionally opted to float their mortgage rates, but this trend may be turning, according to national broker Mortgage Choice.

“Over the last few weeks, several of Australia’s lenders have slashed the interest on their suite of fixed rate products, taking their home loan rates to new historical lows,” Mortgage Choice spokesperson Jessica Darnbrough said.

“At present, three of the four majors are offering five-year fixed rate mortgages with an interest rate of just 4.99 per cent – which is largely unheard of,” Ms Darnbrough said.

“With this in mind, it wouldn’t be a surprise to see fixed rate activity lift over August as borrowers opt to lock their mortgage in at the historically low rate and provide themselves with some certainty around their mortgage repayments for a specific time period,” he said.

Fixed rates have been most popular in Queensland, accounting for 28.02 per cent of all loans written, according to the latest data from Mortgage Choice.


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