Cash rate cuts have hogged the limelight for some time, but attention may now turn to the central bank’s Term Funding Facility.
With the Reserve Bank (RBA) cutting the cash rate to a record low 0.10% in November and again ruling out negative rates, the cash rate has essentially reached the end of its tether.
The RBA doesn’t expect to raise the cash rate for at least three years, so monetary policy is now focused mainly around its quantitative easing program and the Term Funding Facility (TFF).
Buying a home or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for owner occupiers.
Smart Booster Home Loan
- Discount variable for 1 year <=80% LVR
- No ongoing fees
- Unlimited redraw facility
Monthly repayments: $1,476
- Discount variable for 1 year
- No ongoing fees
- Unlimited redraw facility
Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. The product and rate must be clearly published on the Product Provider’s web site. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.
What is the TFF?
The TFF was announced in March as part of the RBA’s response to the economic fallout from COVID-19.
It provides a large amount of funding to banks at a very low-interest rate to be repaid over three years, further encouraging banks to lend to households and businesses.
When it was first established, the TFF had $90 billion worth of funding available to banks, at a fixed three-year rate of 0.25% (in line with the cash rate), available until the end of March 2021.
It was then expanded in September, with the RBA announcing the TFF would have $200 billion of funding available and extended the deadline for withdrawal to the end of June 2021.
As of September, banks had withdrawn $52 billion of funding from the TFF.
With the cash rate cut in November, the interest rate for the TFF dropped to 0.10% over three years for new withdrawals.
What is the purpose of the TFF?
According to the RBA, the TFF has two objectives:
“To reinforce the benefits to the economy of a lower cash rate, by reducing the funding costs of ADIs (authorised deposit-taking institutions) and in turn helping to reduce interest rates for borrowers. It will complement the reduction in funding costs from the Reserve Bank's target for three-year Australian Government bond yields.”
“To encourage ADIs to support businesses during a difficult period, ADIs will have access to additional low-cost funding if they expand their lending to businesses over the period ahead. The scheme encourages lending to all businesses, although the incentives are stronger for small and medium-sized enterprises (SMEs).”
Both objectives are essentially centred around making it as easy and cheap as possible for ADIs to lend money to households and businesses.
The first is a three-pronged policy for households, made up of a record low cash rate of 0.10%, a quantitative easing program, and the TFF. Each policy works in unison to strongly encourage lenders to borrow money from the central bank and then lend it to borrowers.
The second objective for businesses is aimed at offsetting the fallout from lockdowns which forced many businesses to shut their doors at the height of the pandemic. ADIs can receive greater funding from the central bank if they give SMEs access to more affordable funding.
Who is eligible for the TFF?
Unfortunately, regular punters can’t gain access to loans from the RBA at the rock bottom 0.10% interest rate.
All ADIs that extend credit are eligible to participate in the TFF. They also need to be able to provide collateral to the RBA, which to do, they need to be members of the Reserve Bank Information and Transfer System, and AustraClear (the central securities depository used by the Reserve Bank in its domestic market operations).
Over 130 ADIs satisfy these requirements and those which don’t can apply to the RBA to enable them to participate.
Banks can draw on 3% of their total credit outstanding to Australian resident households and non-related businesses. This is measured as the average of the bank's total credit to the three months ending 31 January 2020.
They can also draw on additional funding if they increase their lending to businesses, compared to the three months in lending to large business and lending to SMEs in the three months ending 31 January 2020.
Why has the TFF become more important?
In a speech given after announcing the November rate cut, RBA Governor Phillip Lowe said in terms of the cash rate, nothing else could be done.
“There has been no change to the Board's view that there is little to be gained from lowering the policy rate into negative territory,” Dr Lowe said.
“While a negative rate might lead to a helpful depreciation of the Australian dollar, it could impair the supply of credit to the economy and lead some people to save more, rather than spend more.
“Given this assessment, the Board continues to view a negative policy rate in Australia as extraordinarily unlikely.”
Despite interest rates reaching their floor, Dr Lowe denied the central bank was out of options.
“The Reserve Bank is not out of firepower. We have additional monetary policy options and we are prepared to use them if the circumstances require.”
And Dr Lowe is correct. The November rate cut announcement also brought with it a $100 billion expansion of the RBA’s quantitative easing program.
Additionally, the interest rate on the TFF was lowered to 0.10%, in line with the cash rate cut.
With cash rate cuts out of the arsenal of monetary policy weapons the RBA has, the TFF has arguably increased in importance.
Bank margins will be squeezed ever tighter as a result of the latest cash rate cut, with many no doubt questioning the viability of passing on the cut.
However, the TFF allows banks to draw on funding at an extraordinarily low rate, with the option for greater funding should they increase lending to businesses.
This access to cheap capital allows banks to lower home loan rates, where if not for the TFF, they may not have been able to.
With pressure from the RBA and the Treasurer to pass on the cash rate cut, lenders may look to draw from the TFF in greater numbers and volume.
Should this happen, increasing the size and timeline of the TFF may lead it to become the most important tool in the RBA’s arsenal.
The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:
- The big four banks are: ANZ, CBA, NAB and Westpac
- The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2020. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
- The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.
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.
In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.
*Comparison rate is based on a loan of $150,000 over a term of 25 years. Please note the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as redraw fees and costs savings, such as fee waivers, are not included in the comparison rate but may inﬂuence the cost of the loan.
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