For home loan rates, the only way is up (zz)

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http://business.smh.com.au/busin ... -20090614-c7cb.html

Danny John
June 15, 2009

THE fall in fixed-rate mortgages, particularly longer-term offers, has bottomed out and prices are beginning to rise again in a further sign of the pressure being applied to bank financing costs.

While one- and two-year deals still offer good value in comparison to floating standard variable home loan rates, those of three years and longer are creeping up in price as lenders pass on their own higher cost of borrowing.

Industry commentators believe that fixed rates have now reached their low point after the huge falls in prices seen since October when the Reserve Bank began slashing the official cash rate by four percentage points to offset the impact of the recession on the economy.

That had an across-the-board effect on the fixed-rate market, particularly on short-term offers that have fallen below the popular variable rate. But with the cost of wholesale funding from the international debt markets still at much higher levels than 18 months ago, lenders are finding it difficult to maintain the current low prices despite the inflow of deposits that helps them to fund mortgages.

That was the reason given by the Commonwealth Bank last Friday when it lifted its standard variable rate by 10 basis points to 5.74 per cent in a move that was criticised by the Rudd Government and consumer groups as profiteering and putting at risk the economic recovery.

Most lenders are now charging between 5.7 per cent and 5.9 per cent for a floating interest rate loan, although some building societies have been able to lop as much as 0.5 percentage points off that thanks to their total dependency on deposit funding.

Home owners can still reduce part of the additional cost by locking in their mortgages for between one and two years.

Cheaper short-term money market rates have allowed banks to cut their offerings in recent weeks below the new price of variable priced mortgages. One of the biggest lenders, ANZ, reduced its 12-month and 24-month fixed loans by 10 basis points just a fortnight ago to 5.35 per cent and 5.69 per cent respectively because of the fall in cash rates. But rates for three-year mortgages and beyond rose given the higher cost of borrowing longer term.

The cost of this debt is running at 140 basis points - 1.4 percentage points - higher than short-term credit (primarily the three-month money rate). That compares to just 15 basis points - 0.15 percentage points - just before the advent of the global financial crisis.

Money markets are also factoring in the prospect of higher interest rates in the years to come as the global economy recovers and inflation again becomes a problem for central banks to tackle.

As a result, ANZ lifted its three-year fixed rate by 15 basis points, from 6.19 per cent to 6.34 per cent, its four-year product by 20 basis points to 6.79 per cent and its five-year home loan rate by 35 basis points to 7.19 per cent.

Similar rises have been levelled by National Australia Bank with its three-year fixed rate having jumped by 1 per cent since mid-April. The Commonwealth's longer-term mortgages will also rise today, with its fixed rates rising by 15 to 80 basis points for two-year to 15-year loans.

Warren Shaw, the executive general manager of NAB's retail division, said: "Wholesale fixed rates have increased over the last couple of months as the market has factored in better than previously expected economic signals. However, while fixed rates are no longer at bargain basement levels they are still relatively low by historic standards."