Home loan rates fell further than funding costs: RBA

In a new analysis from the Reserve Bank of Australia (RBA), it has noted funding costs and lending rates hit historically low levels in 2021.

The research note by RBA domestic markets manager Rachael Fitzpatrick, analyst Callum Shaw and senior analyst Anirudh Suthaka reflected refinancing and competition in home loans, as well as a shift to lower-margin products, had led to the banks squeezing their lending profitability.

The RBA has estimated that while banks’ outstanding funding costs had declined by around 85 basis points over the past two years, outstanding housing and business interest rates paid by borrowers have fallen by 110 and 115 basis points respectively.

“While the cash rate was little changed over 2021, its very low level helped to keep funding costs low over the year,” the RBA report stated.

“The Reserve Bank’s other policy measures, such as the TFF [Term Funding Facility] and bond purchase program, also put downward pressure on funding costs.”

As documented by the RBA, lenders had lowered their standard variable reference rates on housing loans after the RBA initially slashed the cash rate in 2020 and introduced other monetary policy measures.

The cuts on standard variable reference rates had flowed through to all variable-rate loans.

It also encouraged new mortgage lending and a refinancing fervour, as borrowers opted for lower rates, the report stated.

“Price competition was particularly strong for fixed-rate loans for much of 2021, although rates on new fixed rate loans increased alongside swap rates (the benchmark for fixed-rate lending) towards the end of the year,” the RBA report said.

The RBA team estimated housing loan interest rates fell by around 40 basis points over 2021, alongside the rise of fixed-rate loans.

In line with the rate fall, the proportion of outstanding housing credit occupied by fixed-rate loans doubled over 2020 and 2021 from 20 per cent to around 40 per cent.

As such, the spread between the banks’ average rate on outstanding loans and the average cost of their debt and deposit funding – which provides some insight into their profitability – slimmed.

“The decline in the average lending rate primarily reflects decreases in the interest rates paid by new and refinancing borrowers (particularly on housing loans),” the RBA report explained.

“A shift in the composition of banks’ outstanding loans away from personal credit (which is on average charged a comparatively higher interest rate) towards housing credit also contributed, as the stock of personal lending declined over the year.”

But the rates on new loans began to rise in the second half of 2021, with the largest increases being for products with longer fixed terms.

As a result, borrowers have increased their uptake of low-rate variable loans and pivoted away from longer term, to shorter-term fixed-rate housing loans.

While the banks obtained low-cost funding from the Reserve Bank’s Term Funding Facility (TFF), the share of major banks’ funding obtained from deposits remained higher than it was pre-pandemic.

Deposits accounted for a little more than 60 per cent of the major banks’ overall funding at the end of December, up from around 55 per cent at the end of 2019.

From the end of 2019 to the end of 2021, the stock of deposits at the big four rose by around $360 billion (around 20 per cent) – fed by new lending, as funds made available to borrowers found their way into a deposit somewhere in the banking system.

Bond purchases by the RBA and the decline in banks’ outstanding wholesale debt also contributed to deposit growth.

In contrast the share of major banks’ funding drawn from long-term wholesale debt declined further over 2021, partly reflecting increased reliance on the TFF.

Around 5 per cent of the big four’s funding came from the TFF at the end of December, rising from around 2 per cent at the start of the year.

The major banks used all of their allocated allowances under the TFF over 2020 and 2021.

[Related: Mortgage affordability sees steepest annual decline in 12 years]