Variable rates are… variable much like the name implies, which means they tend to change quite a bit. So how often is ‘quite a bit’ and why do they change?
To understand how often variable rates change, you need to understand why they change in the first place as this determines how often rates move up or down.
So why do variable rates change?
1. The Reserve Bank of Australia (RBA) changes the official cash rate
This is easily one of the biggest factors that influences how often variable rates move because any change to the RBA makes to the official cash rate impacts lenders' decisions on how they set their home loan rates.
Generally, when the official cash rate falls you can usually expect your lender will follow suit and drop their interest rates. Similarly, when the official cash rate rises, your lender is likely to raise their interest rates.
The RBA is in charge of setting the official cash rate every month (except January). The cash rate is basically a barometer of the country’s economic health and influences how high (or low) home loan interest rates are.
The lower the official cash rate, the lower home loan interest rates generally are. Currently, the official cash rate is the lowest it’s ever been at 0.25% and home loan interest rates are subsequently super low, with many rates under 3% p.a.
However, just because the RBA decides to adjust the official cash rate, it doesn’t necessarily follow that your home loan interest will move accordingly. The ball is in the bank’s court on that one because…
2. Banks need to keep their shareholders happy campers
Obviously, banks need to keep their customers happy. But they also have their shareholders to consider. And to do this, the banks need to make sure they have a high return on equity (ROE).
ROE is basically a measure of how efficiently shareholder money is being used to spin a profit for the banks. So for example, hiking up interest rates raises the amount of profit a bank makes, and more profit equals happy shareholders. But lowering interest rates reduces the amount of profit a bank generates which makes shareholders sad - but keeps customers happy.
Banks also need to consider how they can gain more customers. Lowering interest rates can do this but they also need to keep their existing customers happy too. If they lower interest rates for new customers but don’t do the same for existing customers, they may switch to another bank. Phew! So many balls to juggle.
3. Banks also need to cover costs
Without going into too much boring detail, the banks make money by lending it out at a higher rate than they borrow it. Banks source their money through a number of ways, such as wholesale debt, deposits (the money in your bank account), the bank bill swap rate and residential mortgage backed securities (RMBS).
Once the cost of borrowing money from any of these sources goes up, banks then have to increase their interest rates so they can cover these costs.
4. Regulatory changes can also impact variable rates
After the GFC when banks in the US were pretty much giving home loans to anyone (remember that scene in The Big Short where the Miami stripper is telling Carrell’s character she has five houses and a condo?) the Australian Prudential Regulation Authority (APRA) imposed increased restrictions on lending. APRA raised capital requirements for the banks. In order to meet higher capital requirements, home loan interest rates often need to rise.
Basically, regulatory changes are there to make sure the banks aren’t lending to borrowers who can’t afford a home loan. That’s a good thing, because it’s how the US ended up in the GFC dumpster fire to begin with. Sometimes that means interest rates will be higher.
The bottom line
As you can see, there are many factors that can influence how often variable rates change outside of changes made to the official cash rate. There are stakeholders to consider, costs to cover, and of course - customers to keep happy.
The good news is that we’ve recently launched Australia’s first-ever variable rate home loan that starts with a 1. Our Smart Booster Home Loan is available for owner-occupiers for 1.99% p.a. for the first year, before reverting to 2.48% p.a. (2.47% p.a. comparison rate).
If you’re looking to refinance and want to start saving, apply now.