Title Would 30-year fixed-rate mortgages be viable in Australia?
Database Library Publications
Date 24-03-2023
Source Research Paper Series ( Parliamentary Library , Australia )
Author ZHOU, Ian
Citation Id 9081757
Cover date 24 March, 2023
Pages 6p.
Text online yes
Volume (2022-23)

Would 30-year fixed-rate mortgages be viable in Australia?

ISSN 2203-5249


Would 30-year fixed-rate mortgages be viable in Australia? Ian Zhou

Economic Policy Section

Introduction Banks do not offer 30-year fixed-rate residential mortgages in Australia, unlike the United States (US). At the height of the COVID-19 pandemic in 2020–21, a substantial number of Australian borrowers took note of the ultra-low interest rates caused by loose monetary policy, and sensibly locked in fixed-rate mortgages, with fixed-rate periods typically lasting from 1 to 3 years. As interest rates have increased over the past 12 months, these borrowers will likely experience large increases in their minimum loan repayments when their fixed-rate periods end.

With borrowers facing this ‘mortgage cliff’, and amidst fears that interest rates will rise further, commentators such as Professor Richard Holden and Tim Fuller have asked whether Australian banks should start offering 30-year fixed-rate mortgages to borrowers, which could insulate borrowers from big swings in variable interest rates.

This Quick Guide discusses whether 30-year fixed-rate mortgages would be a viable financial product in Australia, by referencing experiences in the US mortgage market.

How many mortgages are on a fixed rate in Australia? Only a minority of Australian borrowers take out fixed-rate mortgages (see Figures 1 and 2).

Furthermore, almost all fixed-rate mortgages in Australia are short- to medium-term mortgages, with fixed-rate periods typically lasting from 1 to 5 years. The ANZ bank and RAMS are the only major lenders in Australia that offer 10-year fixed-rate mortgage products.

Would 30-year fixed-rate mortgages be viable in Australia? 2

Figure 1 Total value of new home loans, variable versus fixed rate

Source: Australian Bureau of Statistics, Lending indicators, data as at March 2023.

Figure 2 Proportion of new home loans that were fixed-rate loans

Source: Australian Bureau of Statistics, Lending indicators, data as at March 2023.








Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23


Total fixed rate housing loans ($billion) Total variable rate housing loans ($billion)












Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23

Would 30-year fixed-rate mortgages be viable in Australia? 3

Why don’t Australian lenders offer 30-year fixed-rate mortgages? It may be riskier and less profitable for lenders to offer long-term fixed-rate mortgages to retail customers, especially if the Reserve Bank subsequently decides to raise its cash rate target, thereby increasing banks’ financing costs.

A longer term fixed-rate period on a mortgage typically exposes lenders to more risk. To compensate for the risk, a 10-year fixed-rate mortgage tends to have a significantly higher interest rate compared with a variable or short-term fixed-rate mortgage (see the example in Figure 3).

In the US, this risk is not borne solely by lenders, but rather shared with government-sponsored enterprises which purchase mortgages from the lenders (discussed further below).

The Australian mortgage market operates differently. The risk is still mostly borne by lenders. Australian lenders are therefore hesitant to lock in rates for 30 years, with the knowledge that many fixed-rate mortgages will have to be held on their books for the entire loan term – regardless of whether changes in the lenders’ financing costs later make these loans unprofitable.

Figure 3 Longer fixed-rate mortgages typically come with higher interest rates

Source: RAMS, ‘Fixed Rate Classic Home Loan’, examples of mortgage lending rates as at 23 March 2023.

Do lenders in other countries offer 30-year fixed-term mortgages? Why? Lenders in the US offer 30-year fixed-term mortgages to retail customers. In fact, the 30-year fixed-term mortgage is by far the most popular mortgage product in the US.

The US mortgage market is unusual in that government-sponsored enterprises (GSEs) operate in the secondary mortgage market. The two most prominent GSEs are the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, popularly known as

‘Freddie Mac’ and ‘Fannie Mae’ respectively.

These GSEs do not issue mortgages to retail customers. Instead, they purchase mortgages from lenders. From 2002 to 2020, approximately 54% of all residential mortgages issued by US lenders were purchased by Freddie Mac and Fannie Mae.

Would 30-year fixed-rate mortgages be viable in Australia? 4

By purchasing mortgages from lenders, the GSEs assume the associated credit risk (associated with central bank’s interest rates policy changes) and the liquidity risk (associated with being unable to call in loan contracts at will). This partly explains why US lenders are willing to offer 30-year fixed-rate mortgages, as they can simply transfer risk to the GSEs.

In addition to the advantages for risk management, these arrangements also create a regular source of new capital for the original lenders. Lenders receive a lump sum of money when they sell their mortgages to the GSEs, and this cash injection enables them to lend more mortgages to customers.

The GSEs in turn transfer some of the risk onto private sector investors. After purchasing a pool of mortgages from lenders, the GSEs securitise these mortgages into mortgage-back securities (MBSs) for sale on investment markets. Securitisation refers to the process of pooling together illiquid assets (in this case, mortgages), repackaging them into tradeable securities and then on-selling these securities.

Freddie Mac and Fannie Mae on-sell their MBSs to institutional investors, such as pension funds and hedge funds. The latter enjoy the prospect of a steady stream of income from the repayments made on the mortgages underlying the MBSs. For the GSEs, the proceeds from on-selling MBSs enables the purchase of more mortgages from lenders, creating a self-reinforcing cycle in the US mortgage market (see Figure 4).

Given the GSEs’ outsized role in the US mortgage market, the US federal government implicitly guarantees them. This implicit guarantee allows the GSEs to raise funds at a lower cost, further reinforcing this cycle.

Put simply, in the US the risk associated with issuing 30-year fixed-rate mortgages is shared between lenders, the GSEs and institutional investors through the mortgage securitisation process.

Figure 4 The GSEs’ role in the US mortgage market

Source: International Monetary Fund, ‘Global Financial Stability Report: October 2008’, 34.

Would 30-year fixed-rate mortgages be viable in Australia? 5

Why doesn’t Australia have a ‘Freddie Mac’ or ‘Fannie Mae’? There are no equivalents to Freddie Mac and Fannie Mae in Australia. In the absence of GSEs, a handful of private sector lenders and financial companies securitise some mortgages in Australia. As a proportion of total value of outstanding mortgages, the market for securitised home loans in Australia is much smaller than the US market.

During the 2008 Global Financial Crisis, Professor Joshua Gans and Christopher Joye proposed that the Australian Government create an ‘AussieMac’ (an Australian ‘Freddie Mac’ equivalent) to inject liquidity into the Australian mortgage securitisation market. Australian lenders – particularly regional banks and non-bank lenders – had trouble accessing funding via the securitisation market at the height of the Global Financial Crisis. In turn, their funding access difficulties limited their mortgage issuance to retail customers and reduced competition in the mortgage market.

Critics of the ‘AussieMac’ proposal argued that the Government should not interfere in the mortgage securitisation market, as the US experience showed that GSEs could encourage both borrowers and lenders to take on excessive risk (known as ‘moral hazard’; for more details see the Parliamentary Library research paper on ‘Financial derivatives and their regulation’). GSEs could also become ‘Too Big to Fail’ and require a taxpayer bailout.

It is unclear whether an ‘AussieMac’ would substantially increase the amount of mortgage securitisation in Australia. Although non-bank lenders rely heavily on securitisation as a source of funding, Australia’s major banks typically do not source large amounts of funding from securitised home loans, as they can access cheaper funding from deposit inflows and the bonds market.

Figure 5 Funding sources for Australia’s major banks

Source: Rachael Fitzpatrick, Callum Shaw and Anirudh Suthakar, ‘Developments in Banks’ Funding Costs and Lending Rates’, Reserve Bank of Australia Bulletin, March 2022.

Would 30-year fixed-rate mortgages be viable in Australia? 6

Other impediments to 30-year fixed-rate mortgages in Australia Borrowers who wish to refinance or terminate fixed-rate mortgages in Australia are usually required to pay a prohibitively high ‘break fee’; this discourages borrowers from signing up to fixed-rate mortgages in the first place. This stands in contrast to the situation in the US, where borrowers are unencumbered by such break fees – but typically pay a higher interest rate to compensate lenders for the extra risk.

Additionally, residential mortgages in Australia are ‘full recourse loans’, which means that if a borrower defaults, the lender can pursue all the borrower’s assets. In the US, some states treat mortgages as non-recourse debt, meaning that the lender can only pursue the loan collateral (usually, the house) in the case of borrower default. In other words, Australian borrowers cannot simply ‘walk away’ from fixed-rate mortgages that they can no longer afford.

Conclusion The lack of an ‘AussieMac’, the diversified nature of funding sources for Australia’s major banks and current mortgage fee structures make 30-year fixed-rate mortgages unlikely to emerge in Australia. For these mortgages to become a viable product, the Australian Government, lenders and institutional investors would need to significantly develop the local mortgage securitisation market.

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