RBA’s Term Funding Facility Creates Cost of Living Crisis for Home Borrowers

At the height of the Covid-19 pandemic lockdowns, the Reserve Bank of Australia (RBA) provided a Term Funding Facility to the banks, lending them $188 billion to provide ultra-cheap home loans. As a result, many borrowers face a severe ‘cliff’ in coming months, with mortgage holders who signed up for a meager fixed rate loan two years ago facing an abrupt 69 percent surge in their monthly repayments. This RBA policy is now pivotal in Australia’s cost of living crisis and could lead to a further decline in house prices.

In 2020 and 2021, the Big Four banks were allocated $51.14 billion, $31.87 billion, $29.78 billion, and $20.09 billion, respectively. By May 2021, the banks were offering average fixed rate loans of just 1.92 percent, with a third, or 35 percent, of Australian home borrowers fixing their loan – a level much higher than the usual 15 percent. In July and August 2021, this number increased to 46 percent of new loans.

CoreLogic’s head of research Eliza Owen explained that the real pain would begin in April as ultra-low fixed rates started expiring, which was likely to see house prices fall further. Sydney’s median house price plunged 15 percent to $ 1.2 million last year.

Mark Bouris, the founder of Wizard Home Loans who is now the executive chairman of Yellow Brick Road, said the RBA’s pandemic intervention was bound to create problems later. He explained that the banks took the money from the RBA at a rate of 0.1 percent and then tried to make a margin by lending it to consumers at a meager rate.

RateCity research director Sally Tindall added that the ‘cliff’ was looming for many borrowers who had taken out fixed-rate loans two years ago. She explained that borrowers had enjoyed low rates for two years but faced a sudden increase in repayments as the fixed period ended. This could strain many households, which may struggle to meet the higher repayments.

Related Facts

• The RBA provided $188 billion to the banks through its Term Funding Facility.
• The Big Four banks were allocated $51.14 billion, $31.87 billion, $29.78 billion, and $20.09 billion, respectively.
• By May 2021, the banks offered average fixed-rate loans of just 1.92 percent.
• In July and August 2021, 46 percent of new loans were fixed-rate products.
• Sydney’s median house price plunged 15 percent to $ 1.2 million last year.

Key Takeaway

The RBA’s Term Funding Facility, which provided the banks with $188 billion to provide ultra-cheap home loans at the height of the Covid lockdowns, is now pivotal in Australia’s cost of living crisis. As a result, many borrowers face a severe ‘cliff’ in coming months, with mortgage holders who signed up for a meager fixed rate loan two years ago facing an abrupt 69 percent surge in their monthly repayments.

Conclusion

The RBA’s Term Funding Facility was designed to help Australians during the Covid-19 pandemic, but it appears to have far-reaching consequences. Many borrowers are now facing a ‘cliff’ in coming months, with a surge in their monthly repayments that could strain many households. This could lead to further declines in house prices and create an even higher cost of living crisis in Australia.