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Saturday, 21 July 2018

Funding costs

Short term funding

I haven't written much here about short term funding costs for Australian lenders, for the most part because the impacts to date have been so moderate.

It's tempting to channel one's inner-Churchillian spirit here ('never in the history of market commentary has so much been made...' etc.), but the point is relevant to the extent that the cost of money globally is becoming more expensive.

Australia's short term funding costs are down from their recent highs, possibly induced by financial year-end pressures, but do remain approximately 25 basis points or so above their long run average. 

This is important to homeowners given that banks and other lenders may look to pass these costs on to borrowers (gotta maintain them $10 billion profits!). 

If you listen to the fixed income gurus that really understand this stuff, the drivers of banks' funding costs can seem confusing and nebulous, but the Business Insider Devils & Details podcast is a great place to start (the proxy used above is 3-month bank accepted bills less the Reserve Bank's expected cash rate).

One of the reasons I haven't much touched on this is that Aussie banks have been obtaining only about a fifth of their funding from short term sources (sometimes more for smaller lenders), so the importance of these figures has been overstated by excitable commentators, as is the case with almost everything these days. 

The remainder of total funding composition is mainly made up of domestic deposits, equity, and long term wholesale debt. 

In March this year the Reserve Bank put out a paper to show how the funding composition of banks has changed since the financial crisis, gradually shifting towards funding sources that are considered more stable. 

Mortgage buffers

The cheapest mortgage deals on the market right now still include 5-year fixed rates from just under 4 per cent, and variable rates from about 3.6 per cent, with comparison rates somewhat higher than these advertised deals.

So mortgage products are clearly still relatively speaking very attractive in historic terms.

Of course, what's of interest is the extent and impact of mortgage rate increases when they really do filter through, so it's one to watch (and for individual borrowers, it's something to budget for).

Fortunately new borrowers are typically assessed at a rate of more than 7 per cent, so there's plenty of buffer being built in by lenders over recent years.