What the end of the Term Funding Facility could mean for your home loan

author-avatar By
on May 26, 2021
What the end of the Term Funding Facility could mean for your home loan

The Reserve Bank's 'Term Funding Facility' ends in June, no longer providing cheap funding to banks. But what does this mean for home loan interest rates?

There's a lot more influencing a bank's funding costs and interest rates than just the Reserve Bank's cash rate. 

This rate has held steady at 0.10% since November 2020, and the message from RBA Governor Dr Philip Lowe is it will stay that way until 2024.

One advent over the last year has been the RBA's Term Funding Facility (TFF), created to provide about $200 billion in cheap funding to banks to keep the debt economy ticking over.

Initially the interest rate was 0.25% to be repaid over three years, but it was later lowered to just 0.10%. 

Banks have until the end of June to draw down the nearly $90 billion left in the TFF before this party comes to an end. 

So after the host has turned on the lights and cut the music, what happens to home loan interest rates?


Advertisement: Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender
Advertised rate Comparison rate* Monthly repayment Rate TypeOffsetRedrawOngoing FeeUpfront FeesLVRLump Sum RepaymentAdditional RepaymentsPre-approval

VariableMore details
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
LIMITED TIME OFFER

Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

  • Fast turnaround times, can meet 30-day settlement
  • For purchase and refinance, min 20% deposit
  • No ongoing or monthly fees, add offset for 0.10%
VariableMore details
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

  • No upfront or ongoing fees
  • 100% full offset account
  • Extra repayments + redraw services
FixedMore details
USE A MARKET LEADING APP TO HELP YOU PAY OFF YOUR LOAN SOONER

Fixed Home Loan 1 year (Principal and Interest) (LVR < 80%)

  • Make up to $20,000 additional repayments per fixed term
  • Redraw available – lets you access any extra loan repayments you’ve made
  • Choose to rate lock for 90 days (fee applies)
USE A MARKET LEADING APP TO HELP YOU PAY OFF YOUR LOAN SOONER

Fixed Home Loan 1 year (Principal and Interest) (LVR < 80%)

  • Make up to $20,000 additional repayments per fixed term
  • Redraw available – lets you access any extra loan repayments you’ve made
  • Choose to rate lock for 90 days (fee applies)
VariableMore details
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • No application or ongoing fees.
  • 100% free offset sub account.
  • Fast online application, approval in minutes not weeks.
  • Mobile app, Visa debit card, Apple and Google Pay
  • Refinance loans and variable rates only.
REFINANCE IN MINUTES, NOT WEEKS

Nano Home Loans Variable Owner Occupied, Principal and Interest (Refinance Only)

  • No application or ongoing fees.
  • 100% free offset sub account.
  • Fast online application, approval in minutes not weeks.
  • Mobile app, Visa debit card, Apple and Google Pay
  • Refinance loans and variable rates only.
VariableMore details
ZERO APPLICATION FEES

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
  • No upfront or ongoing fees
ZERO APPLICATION FEES

Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

  • We lower your rate based off how much you’ve paid down your loan
  • Automatic rate match
  • No upfront or ongoing fees

Rates correct as of January 17, 2022. View disclaimer.

The TFF and home loan rates by the numbers

Savings.com.au considered the end of 'record low' home loan rates back in February, and since then a number of banks have indeed increased interest rates, including CommBank, NAB, Westpac, Citi, and UBank, just to name a few. 

CFO of non-bank lender Firstmac James Austin told Savings.com.au that mortgage "incentives" will disappear and rates will rise further come the end of the TFF. 

"New mortgage rates will start to rise. In fact we are already seeing this to some extent," he said.

"The cheap fixed rate offers of the banks will slowly be removed over the next few months, and the current cash upfront incentives paid by banks will disappear."

Banks that have or have had cashback offers include Bankwest, BOQ, CommBank, NAB, Westpac, RAMS, and St George.

For example, St George offered up to $5,000 cash back on a host of home loans up until 31 March.

Did banks 'need' the TFF?

An end to the TFF means banks will have to go back to old styles of borrowing: bonds and residential mortgage-backed securities (RMBS), which are generally more expensive ways of funding than the TFF.

Mr Austin said the TFF was ultimately "not fair".

"It gifted funding to banks at 10 basis points (0.10%)," he said.

"Non-banks had a knock-on benefit in that the absence of banks from external funding markets (bonds, RMBS) drove down the cost of funding for non-banks to some degree, however on average this was more like 100 basis points (1.00%) versus 10 basis points."

The Reserve Bank has maintained that the TFF will not continue unless "there was a marked deterioration in funding and credit conditions", and right now, economic conditions seem to look good.

To the week ending 24 May, $6.3 billion had been drawn down, and $4.5 billion was drawn down in the previous week.

Banks have so far been slow to draw down on their allowances, with the $4.5 billion figure just the third time in excess of $3 billion has been drawn down in more than six months.

However, Westpac's credit strategy team "expect(s) this to continue to increase into the end of the programme given recent momentum in business lending".

As of 17 May, CommBank still had $28.7 billion left out of a $48 billion total allowance; NAB $14.3 billion from $28.6 billion; ANZ $8 billion from $20.1 billion; Westpac $8 billion from $29.8 billion; and Macquarie had $5.9 billion available from $7.6 billion. 

Mr Austin expects the banks to fully draw down on their allowances on 30 June.

"The banks are waiting until close to the expiry date so as to maximise the term of the funds that they draw down," he said.

What to do as a borrower

There's ultimately not much borrowers can do other than staying on top of the latest home loan news and taking a look at refinancing their home loan to a more competitive rate. 

Many borrowers have been enticed to fix their home loan for three, four, or five years with 'record low' rates. 

In 2020, for example, CommBank's fixed home loan book grew 38% in the second half of the year compared to the first half.

However, breaking a fixed loan early can be difficult, and costly.

AMP chief economist Dr Shane Oliver told Savings.com.au in April about some of the risks of fixed home loans.

"The main danger is in being lulled into a false sense of financial security on the back of the ultra-low fixed rate and not allowing for a possible lift in interest payments if there is a reversion to a much higher variable or even fixed rate when the initial fixed rate ends," he said.

"A sensible approach is to leave some variable though to provide some flexibility."

It's important to note, too, that variable rates can increase out of lockstep with the Reserve Bank's cash rate rises.

Investment expert Peter Switzer provided some tried-and-true tips to borrowers keeping an eye on the mortgage market.

"Look at the ‘suck you in’ headline rates that can be so low but the comparison rates can be really high. Look at the actual monthly repayments and any other fees that actually make the loan you’re comparing more expensive than you think," Mr Switzer said in a recent Switzer Daily column.  

"Can you trust the Reserve Bank Governor Dr Phil Lowe when he says the cash rate will be at 0.1% until 2024?

"If you have overborrowed on a variable home loan, you better hope Dr Phil can keep his promise on interest rates." 


Photo by Carnaby Gilany on Unsplash

Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

Latest Articles

author-avatar
Harrison is Savings.com.au's Assistant Editor. Prior to joining Savings in January 2020, he worked for some of Australia's largest comparison sites and media organisations. With a keen interest in the economy, housing policy, and personal finance, Harrison is passionate about breaking down complex financial topics for the everyday consumer.

Be Savings smart.
Subscribe for free money newsletters.

By subscribing you agree to the Savings Privacy Policy