The fix is in: Australians’ new love affair with locking in mortgage rates

Australians are snapping up fixed-rate home loans at a record pace, laying the foundation for a potentially painful repricing in two or three years’ time.

Fixed-rate mortgages now make up 40 per cent of all new lending.

Australians are snapping up fixed-rate home loans at a record pace, presaging a historic shift away from variable mortgages and laying the foundation for a potentially painful repricing for many borrowers in two or three years’ time.

It comes as UBS became the latest bank to warn of an “up-crash” in house prices, joining ANZ to forecast the risk of a 15 per cent jump in values this year.

CoreLogic figures released this week showed the hot property market gained even more steam in March as home prices jumped by 2.8 per cent in the month, their fastest pace in more than 30 years.

UBS chief economist George Tharenou said he expected house prices nationally to lift by 10 per cent this year, but that there was now a risk of an even more rapid increase, particularly if the Morrison government repeals responsible lending rules.

With three-year mortgage rates of well below 2 per cent on offer, the average difference between fixed and variable home loan rates has blown out to nearly 1.5 percentage points — a record gap, according to ANZ.

Graphic: The Australian

The dash to fix rates has come amid a wider surge in monthly new lending commitments, which are up 75 per cent since the depths of the COVID-19 recession in May.

As banks have competed to offer the most compelling offers, the monthly value of new fixed-rate housing loan commitments, including refinancing, has more than tripled, from $4.7bn immediately pre-pandemic, to $15.7bn in February, according to non-seasonally adjusted data from the Australian Bureau of Statistics.

Typically, around 15 per cent of new home lending is done at a fixed rate, but this had soared to closer to 40 per cent by the start of 2021, according to ANZ analysis.

ANZ head of Australian economics David Plank said that “with refinancing running at very high levels, such a large flow will quickly shift the stock of fixed rate mortgages sharply higher”.

The stock of fixed-rate loans by early 2021 had already climbed to over 25 per cent of total housing credit outstanding, against 20 per cent a year earlier, according to the Reserve Bank of Australia.

Given the extraordinarily low rates on offer today, Mr Plank warned that a wave of households fixing their mortgages today could face “materially” higher repayment costs in two or three years’ time when they refinance.

This roughly matches when RBA governor Philip Lowe has forecast rate hikes.

“Indeed, the timing of the refinancing means that interest costs will rise in the second half of 2023 and through 2024 without the RBA needing to do anything,” Mr Plank said. “This could well lessen the extent of rate hikes through this period.”

The trigger for the sharp fall in fixed versus variable mortgage rates was the Reserve Bank’s announcement in March 2020, at the height of the health crisis, that it would pump $90bn of cheap money into the banking system to encourage lending.

This term funding facility, or TFF, offered three-year funding to lenders tied to the cash rate, which was reduced to 0.1 per cent in November. The scheme has since been expanded to $185bn.

The RBA meets on Tuesday and is expected to keep debt as cheap as possible for as long as possible, despite the surprisingly powerful stimulus-driven post-COVID recovery.