In the lead up to next Wednesday’s RBA meeting, all the big four banks are aligned in their view that an interest rate cut will be handed down.
ANZ has revised it’s forecast, joining its major counterparts in expecting a 25-basis-point cut, having previously anticipated no change in July. ANZ now believes an immediate cut is the “path of least regret” and still anticipates a further 25-basis-point reduction in August.
As it to reinforce ANZ view, they also dropped their 3 year fixed interest to below 5% during the week, joining twelve other lenders with a fixed rate below the 5% mark.
It’s starting to look more and more like a vastly improved year for mortgage holders.
In this week’s newsletter, we unpack fixed interest rates and explain why they are a more complex beast than a variable rate.
Why Fixed Rates Differ by Term
Fixed rates are influenced by future interest rate expectations and the cost of funding over different timeframes. For example, a 1-year fixed rate is typically priced based on short-term funding costs, which are closely tied to the current cash rate and short-term bond yields. Longer fixed terms, like 3 or 5 years, are priced based on longer-term market forecasts and bond rates.
If financial markets expect interest rates to fall, longer-term fixed rates may be lower than short-term ones. Conversely, if rates are expected to rise, longer-term fixed rates are usually higher to reflect the anticipated cost of funds.
In essence, banks price fixed rates based on the risk and cost of lending over the specific fixed period, which is why fixed rates vary depending on the length of the term.
Key Levers That Influence Interest Rates
When banks set interest rates for home loans, they consider a combination of internal costs, market influences, and regulatory requirements. While the RBA cash rate plays a major role, it’s just one part of a more complex picture.
Cost of Funds
Banks need to source the money they lend, either from customer deposits or by borrowing from other financial markets. The cost of accessing this money directly impacts the rates they offer borrowers. When global or domestic funding becomes more expensive, banks typically raise their interest rates.
RBA Cash Rate
The RBA’s cash rate influences the cost of short-term borrowing for banks. When the cash rate moves, banks usually adjust their variable home loan rates in response.
Profit Margins
Like any business, banks need to maintain profitability. They set rates to balance competitive offers with sustainable margins that support their operational costs and shareholder returns.
Market Competition
Banks constantly monitor competitor pricing. Intense competition can lead banks to adjust rates to attract or retain customers, even if profit margins are tighter.
Risk Assessment
Lenders factor in credit risks, including the likelihood of repayment and broader economic conditions. When the market outlook is uncertain, banks may increase rates to account for additional risk.
Variable
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.
