As the name implies, variable home loan rates vary, but how often can they actually 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 home loan rates change? Below are a few reasons why variable rates change.
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' wholesale funding costs, which are then passed onto you.
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 0.10% and home loan interest rates are subsequently super low, with many advertised rates under 2% 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 as quickly or even at all. The ball is in the bank’s court on that one because…
Obviously, banks need to keep their customers happy. But many 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.
loans.com.au benefits from not having to keep shareholders happy - we are an online lender, and a family-owned company, meaning we are more agile than the big banks, and keep on top of the latest market movements to offer competitive home loan rates.
Without going into too much boring detail, the banks make money by lending it out at a higher rate than they borrow it. Any margin they make is called the ‘net interest margin’.
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), as well as various funding sourced from the Reserve Bank, such as the Term Funding Facility and corporate bond purchases.
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.
After the Global Financial Crisis when banks in the US were pretty much giving home loans to anyone, 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 needed to rise.
APRA also imposed restrictions on investment lending and loan-to-value ratios (LVRs) in 2014 and 2017 respectively. 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 borrowers defaulting on their mortgage isn’t good for anyone or the economy, so sometimes that means interest rates will be higher.
As you might have guessed, if your home loan rate is variable and goes up, your home loan repayment also goes up. The opposite is true, too.
Even a few basis points' difference can mean the difference in hundreds of dollars on your repayment. For example:
Say you have a home loan from Bank A. You’ve borrowed $400,000 over 30 years at 3.00% p.a. This would result in monthly repayments of $1,686.
By refinancing to a loans.com.au: Smart Booster discount variable home loan with a two-year intro rate, at 1.85% p.a. (2.21% p.a. comparison rate*), the base repayment is reduced to $1,449 per month.
If you haven’t reviewed your home loan for a while, chances are you could save hundreds of dollars every month by refinancing to a lower rate.
There are a couple ways to prepare for interest rate changes. You’re probably only concerned with rates going one way - up - and not the other way - down.
If you’ve held a home loan for a few years, hopefully your lender has applied a few interest rate cuts to home loan. This is a great opportunity to continue what you were paying on your old rate, because if rates go up again, you are well-prepared to ‘weather the storm’, while also feeling good about getting ahead on your home loan.
Similarly, if your lender hasn’t passed on any interest rate cuts and you’re on a variable rate, refinancing your home loan to a lower rate can be a great way to claw back some savings.
Even if interest rates go up, it’s worthwhile shopping around for a new home loan - chances are there’s a more competitive rate not far around the corner.
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 some of Australia’s lowest-ever variable home loan rates. Our Smart Booster Home Loan is available for owner-occupiers with a 2-year intro rate of 1.85% p.a. (2.21% p.a. comparison rate*).
If you’re looking to refinance and want to start saving, apply now.
No, not necessarily. Lenders' variable rates are influenced by what’s happening in the markets, what the Reserve Bank is doing with its cash rate, and many other factors. It might be a few months or even years until you see interest rates change, or it could happen a few times in a month - it’s not set in stone.
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