Between May 2022 and November 2023, the Reserve Bank raised the cash rate by 425 basis points to its current level of 4.35%, whereas the average outstanding mortgage rate rose by approximately 320 basis points.

This reflects a pass-through rate of 75%, which is the extent to which the cash rate is transmitted to the interest rates charged on loans or offered on deposits. 

The lag in response compared to previous tightening cycles in 2006 and 2009 – wherein the pass-through rate was around 90% – is primarily attributed to a high proportion of outstanding loans at very low fixed rates and intense competition among mortgage lenders.

Fixed-rate home loans slow down pass-through

Fixed-rate borrowing ballooned during the Covid pandemic when rates bottomed out, propelling the share of fixed home loans from around 20% pre-pandemic to almost 40% in early 2022. 

In November 2020, the RBA dropped the cash to a historically low 0.10%. During the same month, the average fixed mortgage rate was between 2.06% and 2.16%. 

But it wasn’t until May 2021 that the fixed-rate home loans on less than three-year terms fell to an average of 1.95%. 

By comparison, variable-rate home loans at that time averaged 2.76%.

“The very low fixed rates on offer reflected lenders’ access to options to fund such products at low rates given the monetary policy settings at the time,” said Benjamin Ung, research author of the RBA Domestic Markets Department. 

The RBA’s unconventional pandemic-era policies - including the Term Funding Facility, the yield target on the three-year Australian Government bonds and quantitative easing - supported mortgage lenders in obtaining low-cost term funding that enabled them to price their fixed rate below the variable rates advertised to new borrowers. 

The share of fixed-rate loans in the outstanding housing credit has since declined to around 17% as of December 2023 as terms expire and mortgages are repriced to higher rates, leading a bulk of borrowers to roll off to variable home loans.

In terms of new lending, they now make up less than 2% (including refinances) according to ABS data.  


Source: RBA

According to the RBA, 15% of fixed mortgages at around 2-2.5% outstanding as of end-2022 expired over the December quarter in 2023 and have repriced to an average mortgage rate of around 6.5%. 

The RBA projects the pass-through rate will align more closely with historical norms once the remaining stock of loans on fixed rate expires by the end of 2024. 

“Under the assumption that these fixed-rate loans reprice to the current outstanding variable rate, the average outstanding mortgage rate is projected to increase by an additional 35 basis points between December 2023 and December 2024,” Mr Ung said. 

Lending competition keeps mortgages low

The recent period of heightened lending competition – when rates were low and cashback deals aplenty – has likewise contributed to a slower pass-through. 

Between the second half of 2022 and early 2023, the average mortgage rate paid on outstanding variable-rate loans increased by 75 basis points less than the cash rate increase, while new loans on variable rates rose by around 40 basis points less. 

“Lending competition for variable-rate mortgages increased over the second half of 2022 as a sustained willingness by banks to compete for mortgage loans at the time coincided with a slowing in housing credit growth,” the RBA said.

Lenders increased discounting and cashback deals of between $2,000 and $5,000 to attract new and refinancing customers helped keep the increase in variable mortgage rates below that of the cash rate. 

This environment has since shifted, with lenders pulling back on their aggressive promotional strategies. 

Mortgage payments increased despite a slower response

Despite a slow response, the flow-through of a higher cash rate to housing mortgage rates has still been an effective transmission channel for monetary policy in the country, according to the RBA.

The central bank noted that housing mortgage payments have increased considerably as a share of household disposable income even though the slower pass-through “has meant that the aggregate repayment burden faced by mortgagors has – so far – increased by less than otherwise”.

Total scheduled household mortgage payments (comprising both interest and scheduled principal payments) have increased to around 10% of household disposable income as of December 2023.

The RBA expects this to climb further to around 10.5% by the end of this year.

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