Lenders increased rates on outstanding mortgages by a total of 320 basis points between May 2022 and December 2023, which was 105 bps less than the increase in the cash rate over that period.
This pass-through rate of around 75 per cent is lower than in previous tightening cycles. When the cash rate went up 175 bps between May 2006 and March 2008, the pass-through rates was 87 per cent; and when the cash rate went up 175 bps between October 2009 and November 2010, the pass-through rates was also 87 per cent.
According to analysis in the latest Reserve Bank Bulletin, this relatively low pass-through was due to the high share of outstanding fixed-rate mortgages and to the impact of intense competition for home lending.
The RBA said the average outstanding mortgage rate will increase further as the remaining share of low fixed-rate loans are rolled over at higher rates. By the end of 2024, overall pass-through is expected to be comparable with earlier tightening periods.
Lenders took advantage of low-cost funding during the pandemic, including the RBA’s Term Funding Facility, to offer low fixed rate mortgages. The share of fixed rate housing loans grew from around 20 per cent to 40 per cent between early 2020 and early 2022.
The bulk of those loans have expired and been rolled over but around 35 per cent of the stock of fixed-rate loans that was outstanding in December 2022 will expire over the rest of this year. This will contribute to a further increase in the outstanding mortgage rate.
The RBA estimates that the average outstanding mortgage rate will increase by another 35 bps between December 2023 and December 2024.
The RBA estimates that heightened mortgage lending competition contributed to the average rate paid on outstanding variable-rate loans increasing by around 75 bps less than the cash rate between May 2022 and December 2023.
And the average rate on new variable rate loans increased by around 40 bps less than the cash rate during that period.
Banks accepted lower spreads on their loans during this period but they were also able to take advantage of “cheap and abundant” deposits. Bank’s average funding costs increased by a little less than the cash rate between May 2022 and December 2023.
The interest rate paid on at-call deposits, which make up around 65 per cent of all deposits, increased by 160 bps between May 2022 and December 2023.
The average increase in discounts on advertised mortgage rates peaked at around 35 bps at the start of 2023, at a time when more then 30 lenders were offering cashbacks of up to $5,000.
The market remains very competitive. The RBA said: “Despite some signs of easing competition, many lenders have remained willing to negotiate discounts to retain existing borrowers. External refinancing activity has also remained at elevated levels after increasing sharply over the second half of 2022.”