This means Australia may not have to lift cash rates by as much as its peers to subdue inflation, because of the broader effect of monetary policy on the economy and also the preference for variable home loans.The US Federal Reserve has lifted cash rates by 5 percentage points since late 2021. As a result 30-year mortgages have surged above 7.2 per cent compared with the 30-year mortgage bond benchmark, Fannie Mae, which has risen 4.3 per cent from its pandemic lows.
According to the US senior loans officers report, business demand for loans has fallen significantly. More than 50 per cent of banks have also tightened the lending standards for commercial and industrial loans.This points to the way monetary tightening works in the US which is via the increased cost of business loans rather than existing home lending, where 64 per cent of US households own a home and 23 per cent are without a mortgage.
New Zealanders also prefer fixed rate mortgages, with the average fixed term two years. That means the effective interest rate on mortgages has risen about 190 basis points and should rise on current implied pricing to about 5.7 per cent by February. The fixed rate mortgage cliff in Australia makes for a good headline but the uplift in fixed rate home borrowing during the pandemic leaves 65 per cent of mortgages on a variable rate. The reversion of these fixed loans to variable increases this to about 80 per cent.For more context, UK floating rate mortgages fell from 70 per cent in 2011 to slightly more than 10 per cent now. They are now a largely fixed-rate regime with an average of five years.
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