Australians have long held a preference for the flexibility of variable rate mortgages where the interest rate increases or decreases in line with the Reserve Bank of Australia’s (RBA) monthly cash rate decision.
Typically, a high RBA cash rate results in high interest rates on home loans, car loans, personal loans, savings accounts and term deposits. Similarly, a low cash rate results in low interest rates on these products - which has proven in recent times to be a handy tool at the disposal of borrowers entering the property market.
As a rule of thumb, banks and lenders don't need to move in lock-step with the RBA's cash rate, however do so given any change the RBA makes to the official cash rate impacts lenders' wholesale funding costs, which are then passed onto borrowers.
It’s all about the money, money, money
Say the RBA lifts the cash rate by 50 basis points or 0.50% in August, taking it to 1.85% compared to the 1.35% it was a month ago. Generally speaking, banks and lenders will pass on the full 50 basis point increase to variable rate mortgages, yet some may increase by more, others less - a rarity as banks like any business, rely on generating profits.
Variable rates are often based off the Bank Bill Swap Rate (BBSW) and are more sensitive to the RBA's cash rate target.
Managing Partner of financial advisory firm LCI Partners Gerry Incollingo said increasing variable mortgage rates above the cash rate is all about capital costs to specific banks and lenders.
“Non-major banks and fintechs have a higher cost of capital than the big four banks who have a baseline cost of capital and future funding locked in at lower costs,” Mr Incollingo told Savings.com.au.
“All of the banks have borrowed on the money they are lending and all current lending or debt is locked in prior, given banks have future-proofed their business.”
This is particularly seen with fixed-rate mortgages, as banks and lenders typically have locked in increases to fixed rates much earlier than they take effect.
Read more: The real reason fixed mortgage rates are increasing
Mr Incollingo said the major banks try to pre-lock in future borrowing, and when they do it is always at lower costs than some non-bank lenders.
“The ones who haven’t pre-locked in future borrowing at lower rates don’t have the option to do so, so the costs for them to borrow right now, then on lend the money via mortgages is more expensive,” he said.
“This, when combined with inflation, means higher interest rates for consumers.”
Should I refinance now?
Since the RBA made the decision to lift the cash rate in May, Aussies have jumped on the front foot to refinance their variable-rate home loans to take advantage of savings before it’s too late.
ABS data for July 2022 revealed Aussies unwinding from fixed rates are electing to stick to the variable rate market, with the value of variable rate loan commitments increasing some $9 billion from April.
Markets are expecting the cash rate to hit 2.50% by year's end, some economists now forecasting even higher, which in turn will mean variable mortgage rates will be dragged up too. The potential therefore lies for some homeowners to breach their original serviceability ceiling prior to the year’s end.
Speaking to Savings.com.au recently, WLTH national lending manager Chad Hoy Poy, said the aim is to refinance as soon as possible.
"Given the expectation of many economists and industry experts for interest rates to continue rising throughout the year, homeowners should look to refinance as soon as possible," Mr Hoy Poy said.
"As interest rates increase, the ability to borrow decreases as loan repayments increase in line with increasing interest rates and serviceability buffers used by lenders."
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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 | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.08% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% | 4.6 Star Customer Ratings |
| Promoted | Disclosure | |||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% | Apply in minutes |
| Promoted | Disclosure | |||||||||
6.09% p.a. | 6.11% p.a. | $3,027 | Principal & Interest | Variable | $0 | $250 | 60% |
| Promoted | Disclosure |
Image by Jonathan Chng via Unsplash
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Harry O'Sullivan
Denise Raward
Staff Writers
