We’ve never seen money this cheap. But it could get cheaper yet.
Interest rates have tumbled since Covid was unleashed on the world, and they could still go lower yet.
Right now, many lenders, especially the big lenders, have chalk-board rates below 2%.
That’s phenomenal. When I started investing mortgage rates were well into double digits. I could imagine getting a mortgage rate with a one in front of it.
And the thing is, mortgage rates could actually keep going lower.
If you look at what’s happened to borrowing costs, there was an immediate drop post-Covid, as the RBA slashed the official cash rate to 0.1%.
After that though, they kept drifting south, to their current incredible lows.
There’s a couple of reasons for this.
The first is the RBA’s Term Funding Facility (TFF) which gives banks access to money at the cash rate of 0.1%, so long as they lend it out to borrowers.
Since the TFF is a fixed rate facility, the banks have passed it on to borrowers at super-cheap fixed rates.
It’s why fixed rates are so much cheaper than variable rates right now, and why fixed rates, as a share of total loans, are at record levels.
Take a look at the boom in fixed rate lending in CBA’s mortgage book:
There’s also been a boom in 4-year fixed rate mortgages, as people lock in the cheap money for as long as possible.
The second factor driving this is more of a global story.
Money is cheap everywhere right now. Since banks tap a lot of their money from international money markets, they’ve got access to a tonne of cheap capital right now.
It’s not 0.1% cheap, but it’s still cheap.
And this, along with inter-bank competition, has seen mortgage rates collapse.
Predictably, when interest rates tank, mortgage lending goes through the roof, as people look to capitalise on super cheap rates.
And you can see that in all the measures of mortgage lending. They’re booming. CBA’s book has gone vertical:
But this is across the board:
And, just as predictably, when finance booms, so do prices.
The investment bank UBS lines the two up, and given where mortgage lending has gone, they reckon house prices are heading to 15% year on year in the very near future.
And after that, who knows where we’ll end up.
At lot of that will come down to where interest rates go from here.
And while the official cash rate has hit the floor and isn’t going any lower, as I’ve said, it’s not the only factor influencing mortgage rates.
The RBA has other tools at its disposal, and trends in global money markets are also a factor.
And the direction is still towards cheaper, more abundant money.
So the question is live.
Rates are cheap. Super cheap.
But there is every chance they could still go lower yet.
JG
Ruth says
Jon what do you think the chances are of APRA intervention?