CBA hikes three and four-year fixed mortgage rates, more banks set to follow

Commonwealth Bank has called the bottom on cheap home loans, and more banks are set to follow.

More banks are likely to follow the CBA in lifting fixed mortgage rates Picture: Bianca De Marchi

Commonwealth Bank has called the bottom on ultra-low rates, hiking its three and four-year fixed mortgage rates, as analysts say more banks will soon follow which could dampen property price growth.

The move marks a turning point for borrowers with fixed rates at the shorter-year duration now starting to lift as wholesale funding costs rise, despite efforts by central banks around the world to lock in ultra-low rates.

CBA raised both its three and four-year fixed rates by 0.05 per cent on Friday. This takes its three-year fixed rate at 2.19 per cent and its four-year fixed rate at 2.24 per cent.

The hike to the three-year fixed rate is the first time CBA has lifted those rates since 2016.

The move comes after five other smaller banks and non-bank lenders also raised three-year fixed rates in the last month.

This follows CBA’s 0.2 per cent hike to its four-year fixed rate in March.

Over the past year Australians have sought to lock in the ultra-low rates as the Reserve Bank of Australia has insisted it has no plans to raise the official cash rate until 2024.

Latest official figures show the value of new fixed rate loans in March surged 34.5 per cent.

RateCity.com.au research director, Sally Tindall, said CBA was the first major lender to increase its three-year fixed rate from the bank’s record low and more banks were set to follow.

“The rate hikes might be small, but they point to a fixed-rate market that’s starting to rise,” she said.

“When CBA hiked its four-year rate in March, a flurry of lenders followed in its wake. We expect the same thing will happen with three-year rates in coming months.”

Susan Mitchell, CEO of ASX listed broker group Mortgage Choice said borrowers have seen the lowest point of three and four year fixed rate loans.

“(But) the two year rates are still quite low, as is the one year rate, and there’s not been a movement in the variable rate of owner occupied.”

AMP Capital Chief Economist Shane Oliver said the bank funding costs were increasing alongside bond yields as a resurgent global economy prompted investors to pull money out of debt markets and into risky assets including shares.

“Earlier in the year we saw bond yields rise and that was probably the factor in driving bank four year fixed mortgage rates up at the time,” Dr Oliver said.

“Now that hike seems more permanent, rates have stayed at higher levels.”

Westpac, National Australia Bank and ANZ all currently offer three-year fixed rates below CBA’s new funding cost.

The move takes CBA’s four-year loan cost in line with ANZ, although Westpac and NAB continue to offer rates at 2.19 per cent.

CBA, ANZ, and Westpac are the only big banks still offering two-year fixed loans with rates below 2 per cent.

Westpac is the last big four bank offering one-year fixed rates below 2 per cent.

Commonwealth Bank CBA is the first major lender to increase its three-year fixed rate from the bank’s record low. Picture: Bianca De Marchi

Dr Oliver said that although the rate moves were “fairly small in the greater scheme of things,” they would put a damper on property price growth, which have lifted 6.8 per cent in the last quarter – the fastest pace since December 1988, according to CoreLogic.

“40 per cent of mortgages in recent times have been fixed rate mortgages so it could act as a bit of a dampener on the property market – there was a lot of demand for those 4 year rates when they were below 2 per cent on some deals,” he said.

But Ms Mitchell said the rate lifts wouldn’t impact demand or price growth.

“I don’t think this rate change will affect the demand, it is not enough of a change,” she said. “Most people who are getting a loan at this point won’t be fixing the entire amount, they will be fixing only half of it and letting the rest be variable so they can pay down that half faster.

“The rise in the variable rates will be when you start to see an effect on demand.”

Ms Tindall said the end of the Reserve Bank of Australia’s term funding facility in just over a month would spell the end to ultra-cheap lending and eventually push up variable rates.

The RBA’s term funding facility, which offered three-year funding to authorised deposit-taking institutions, was introduced in March 2020 in recognition of the massive economic dislocation created by the COVID-19 pandemic.

The scheme, which was extended in September is set to expire on 30 June 2021.

“Banks are anticipating a rise in the cost of funding over the next few years, with the next cash rate hike expected in 2024, if not earlier, and the end of the RBA’s term funding facility in just over one month,” Ms Tindall said.

“The funding, which offers banks cheap money fixed for three years, has helped lenders offer record low rates to its customers.”

Dr Oliver said aside from the end of the term funding facility, an impending RBA decision on whether to roll over its three-year 0.1 per cent yield target from the April 2024 bond to the November 2024 bond could push up borrowing costs.

He believes the RBA won’t roll over its target, exposing bonds held by banks with a maturity beyond it to a market where yields are lifting.

“So you are having the effect of higher funding costs in wholesale bond markets which underpin fixed mortgage rates and the RBA facilities which would normally protect banks from those costs are diminishing in significance.”

He also said the rate rise could speak to an expectation the RBA could lift interest rates before their current estimation of 2024.

The RBA wants to wait until they can be confident inflation can be sustained in the 2 -to 3 per cent zone,” he said.

“To do that we need wages growth above 3 per cent and we are still a long way from that.

“But I think given the speed of economic recovery and decline in unemployment, we will get to that point earlier than the RBA is expecting and we will probably get that rate hike in 2023 sometime.”