Why did my home loan interest rate change?

Adam Smith 27 June 2018 NEWS

An image of stacked coins and high buildings.Lenders are making upward rate moves outside of the RBA. This is why.

The Reserve Bank has remained on the sidelines for a record 20 consecutive meetings, leaving the cash rate at 1.50%. In spite of this long period of inactivity, home loan rates have been anything but static.

Five lenders have recently raised their rates outside of the Reserve Bank. Bank of Queensland, IMB, AMP, Greater Bank and Homestar Finance have all announced out-of-cycle rate hikes, with AMP lifting rates on investment products by up to 40 basis points.

Bank of Queensland acting group executive Anthony Rose said the lender chose to raise rates due to funding pressures.

"Funding costs have significantly risen since February and have primarily been driven by an increase in 30- and 90-day BBSW rates, along with competition for term deposits. While the bank has absorbed these costs for some time, the changes announced will help to offset the impact of increased funding costs," Rose said.

Any big rate moves by lenders grab a lot of media attention, but little time is invested in explaining why lenders might move on home loan rates. Certainly, the Reserve Bank does play a role in determining bank funding costs.

However, terms like "BBSW" can be confusing for consumers. So why do lenders change their rates? We've broken down the main reasons.

The Reserve Bank cash rate

The RBA makes headlines every time it holds its monthly cash rate meeting, but what exactly is the cash rate and how does it impact the rates banks charge you? The cash rate is the rate the RBA charges banks for overnight loans.

When deciding to move on the cash rate, the RBA takes several factors into account, such as employment, inflation, gross domestic product, consumer spending and confidence and the performance of the housing market. The Reserve Bank moves the cash rate to try to balance out growth and inflation.

Slowing inflation

One of the Reserve Bank’s primary objectives is to keep inflation low, ensuring that the prices of consumer goods don’t rise too quickly and erode consumers’ buying power.

The RBA has a 2-3% target band for inflation. It gauges this by watching the Consumer Price Index (CPI). This monthly measure shows the cost of a selection, or basket, of common consumer goods and services.

By seeing how much this index increases each month, the RBA can keep an eye on inflation. If it finds inflation is rising above its 2-3% target band, the bank may raise the official cash rate to slow consumer spending, thus slowing price growth.

Promoting growth

If the RBA wants to create economic growth, they might choose to cut the official cash rate. The intention behind this is to make money less expensive to borrow and outstanding loans less expensive to pay off, thus encouraging consumers to spend.

The Reserve Bank also pays attention to the unemployment rate in making its decisions. A higher unemployment rate could be a sign of a lack of business confidence and investment. This could lead the bank to cut the official cash rate in order to provide a boost to business confidence and, in turn, encourage hiring.

The RBA's historic cash rate moves

Funding costs

Money house loanThe money banks lend you has to come from somewhere, of course. For most lenders, the source of this money is a mix of deposits and what’s known as wholesale debt. Wholesale debt is money the bank borrows at a lower rate and then lends on to borrowers.

An example of wholesale debt is a residential mortgage backed security (RMBS). This is a pool of mortgages owned by the bank that it sells as a bond to investors. The bank secures funds this way to make new loans to consumers, but it also incurs debt because it has to pay investors back based on the performance of these mortgages.

Another factor influencing bank funding is the BBSW, or Bank Bill Swap Rate. This is the rate banks charge each other to lend money, generally for terms of six months or less.

Banks borrow money from one another to cover their day-to-day costs. On some days, a bank may spend more money than it brings in.

To cover its outgoings and have enough money on hand to cover its deposits, a bank will borrow short-term funds from another bank. The interest rate on these short-term borrowings is the BBSW.

In addition to this, banks also have to compete for retail deposits. This means the money you decide to place in a savings account or term deposit.

To make term deposits attractive for retail customers, banks have to compete by offering higher interest rates. The higher an interest rate a bank offers on its term deposit, the lower its net interest margin (NIM) on the loans it offers.

A variety of factors influence the amount banks pay for wholesale debt. Overseas bond markets, investor risk appetite and competition for funding sources all have a huge impact on the cost of funds for Australian banks.

Regulatory change

One of the biggest factors affecting the cost of funds for banks is regulatory change. In Australia, banks are regulated by the Australian Prudential Regulation Authority (APRA). APRA sets capital requirements for banks, which means it determines the ratio of money a bank has to hold in reserve for every dollar it loans out. After the global financial crisis, APRA followed other global banking regulators in raising capital requirements for banks.

You may have heard of Basel III in relation to banking regulation. Basel III is a set of global reform measures instituted after the GFC to make sure banks have enough capital in reserve to pay back their depositors in case of an economic downturn.

This means that from 2019, banks will have to hold more money relative to the amount they lend, which makes the cost of lending money rise. This, in turn, can make your home loan rate go up as banks try to meet new capital requirements.

Not all lenders are regulated by APRA, though. APRA only oversees what are known as Authorised Deposit-taking Institutions (ADIs). This includes banks, mutual banks, credit unions and building societies.

While this captures many of the lenders in the market, there are a number of non-bank lenders that don’t fall under this umbrella. Because they don’t take deposits, that means these lenders assume all the risk for their home loans.

As such, they don’t have to meet capital requirements. This often means these lenders can offer a sharper rate than their ADI competitors.

This doesn’t always mean, though, that non-bank lenders are totally immune to regulatory change. While they may not be directly impacted by higher capital requirements, many non-bank lenders source at least some of their funding from banks. This creates the possibility that regulatory changes impacting banks can have a flow-on effect for non-banks.

FAST FACT:

The Australian Prudential Regulation Authority (APRA) regulates Authorised Deposit-taking Institutions (ADIs). This means banks, mutuals, credit unions and building societies. Non-bank lenders are not regulated by APRA.

Shareholder pressures

In weighing up the decision to move on rates, banks often try to balance the desires of their customers with the desires of their shareholders. While bank profitability tends to make headlines, the number banks really pay attention to is their Return on Equity (ROE).

A bank’s ROE is the amount of net income a bank generates as a percentage of its shareholders’ investment. Cutting rates on home loans will often reduce a bank’s ROE, while raising rates will increase it. In answering to its shareholders, a bank wants to deliver the highest ROE possible without also alienating borrowers. It’s this balancing act that can see a bank move on rates outside of the RBA.

Home loan appetite

Banks might not come out and say it, but their appetite for growth can play a huge role in the competitiveness of their rate offering. In setting their home loan strategy, banks make a decision about how fast they want to grow their total portfolio of home loans.

You may have heard banks in their financial results referring to growing at, above or below system growth. System growth is the average growth of the home loan market across all lenders. If a bank decides it wants to grow above system, it means it has a higher appetite for home loans.

To achieve this, it might cut its interest rates independent of the RBA in order to create more home loan demand. If it decides it wants to slow down its growth, it might not be as concerned with bringing a competitive offering to the market. It might even choose to raise rates in order to blunt home loan demand.

What to do about it

Out-of-cycle rate moves can cut both ways. Banks can lower rates outside of the RBA in order to generate more demand for their products, but they can also raise them if their funding costs go up or if they want to generate a higher ROE. However, this doesn’t mean you have to be at the mercy of out-of-cycle rate hikes.home loan calculator

When your bank moves on rates, it’s a great time to check into getting a better deal through another lender. As we mentioned above, non-bank lenders are often able to offer sharper rates because they don’t face the same capital requirements and regulatory changes. Likewise, a move by one bank might not signal a move by all other banks.

Banks can face different funding and profitability pressures, and an out-of-cycle rate hike by one lender can present an opportunity for other banks - and for you - for more competitive deals.

Refinance your home loan

Rates last updated June 25th, 2019
$
% p.a.
Offset account
Split account
Loan type
Your filter criteria do not match any product
Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Maximum Insured LVR Amount Saved Short Description
3.34%
3.30%
$0
$0 p.a.
80%
Low variable rate mortgage for owner occupiers looking to switch. Refinancers only.
3.59%
3.59%
$0
$0 p.a.
80%
Enjoy flexible repayments, a redraw facility and the ability to split your loan. Plus, pay no application or ongoing fees. UBank will cut its variable rates for new and existing customers on June 28, making this rate even lower.
3.44%
3.44%
$0
$0 p.a.
70%
A simple mortgage with no application or ongoing fees that has extra repayments plus split and redraw options. Requires a 30% deposit.
3.47%
3.48%
$0
$0 p.a.
90%
Get a low interest rate loan with no ongoing fees. Plus you can make extra repayments and free redraw online. Available with just a 10% deposit.
3.43%
4.26%
$0
$395 p.a.
80%
Lock in a competitive rate for owner occupiers for two years. Extra repayments up to $30,000 over the life of the fixed period can be made.
3.44%
3.70%
$0
$248 p.a.
70%
Borrowers with a 30% deposit can get this competitive rate. Cut down on interest costs with a 100% offset account.
3.44%
3.48%
$0
$10 monthly ($120 p.a.)
80%
Get a competitive variable rate and a 100% offset account.
3.54%
3.57%
$445
$0 p.a.
90%
NSW and ACT customers only. Get a special discount for a limited time when you open an IMB Transaction Account.
2.99%
4.09%
$395
$0 p.a.
80%
Fix your mortgage for 1 year with a very competitive rate and no ongoing fees.
3.73%
4.76%
$0
$0 p.a.
80%
Pay no application fees and access a fee-free redraw facility with this fixed rate loan.
3.69%
4.89%
$300
$10 monthly ($120 p.a.)
80%
Special offer for new lending between $150k-$500k & under 80% LVR.
3.54%
3.54%
$0
$0 p.a.
80%
Low fee loan with extra repayments. Pay no application and ongoing fees and take advantage of split and redraw options.
3.49%
3.49%
$0
$10 monthly ($120 p.a.)
95%
Lock in a competitive rate for three years while you pay off your home. 100% offset account attached.
3.24%
3.88%
$395
$0 p.a.
80%
A competitive fixed interest rate product with no ongoing bank fees.
3.70%
3.72%
$0
$0 p.a.
90%
Save on interest with a free 100% offset account and buy your property with just a 10% deposit.
3.65%
3.66%
$500 (if over 80% LVR)
$0 p.a.
80%
A competitive variable mortgage for home buyers. This loan has flexible repayments and an optional redraw facility.
3.79%
4.22%
$0
$395 p.a.
80%
Unlock a range of savings with this competitive package home loan offer. Offset account and redraw facility included.
3.54%
3.55%
$0
$0 p.a.
70%
A competitive, discounted variable interest rate for home buyers.
3.57%
3.61%
$0
$0 p.a.
95%
A simplified mortgage with a low interest rate and a redraw facility. Approval fee waived for a limited time.
3.59%
3.47%
$0
$0 p.a.
70%
Get a low fixed rate for 2 years to minimise interest costs. Requires a 30% deposit.
3.97%
3.99%
$0
$0 p.a.
80%
This variable rate loan keeps the features simple and fees low. This loan is offered by a 100% online lender.
3.49%
4.32%
$445
$6 monthly ($72 p.a.)
90%
NSW and ACT customers only. 3 years fixed interest terms and free access to redraw facility online.
3.49%
3.52%
$500
$0 p.a.
95%
This mortgage combines a very sharp interest rate with a 100% offset account and it's available with a 5% deposit.
3.58%
4.85%
$0
$0 p.a.
80%
Get a low fixed rate and pay no application or ongoing fees.
3.39%
3.92%
$395
$0 p.a.
80%
A competitive 3 year fixed rate with no ongoing bank fees.
3.39%
4.30%
$300
$10 monthly ($120 p.a.)
90%
A low fixed rate loan that lets you borrow up to 90% of your property's value.
3.64%
3.64%
$0
$0 p.a.
80%
Access an offset account and pay no application or ongoing fees on this special variable rate for owner-occupiers.
3.39%
4.12%
$395
$0 p.a.
80%
A one year fixed rate offer with no ongoing bank fees.
3.54%
3.80%
$0
$248 p.a.
80%
Has a 100% offset account which helps you save on the amount of interest you pay on your mortgage.
3.79%
4.60%
$395
$0 p.a.
80%
Investors can enjoy flexible repayments and an easy application process with this pioneering online lender.

Compare up to 4 providers

Aussie Home Loans Logo

Enter your details below to receive an obligation-free quote from an Aussie mortgage broker today

By submitting this form, you agree to the Finder Privacy and Cookies Policy and Terms of Use

Applications are subject to approval. Conditions, fees and charges apply. Please note that you need to be an Australian citizen or permanent resident to apply.

Credit services for Aussie Select products are provided by AHL Investments Pty Ltd ACN 105 265 861 (“Aussie”) and its appointed credit representatives, Australian Credit Licence 246786. Aussie is a trade mark of AHL Investments Pty Ltd. Aussie is a subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124. © 2019 AHL Investments Pty Ltd ABN 27 105 265 861 Australian Credit Licence 246786. Credit for Aussie Select products is provided by Residential Mortgage Group Pty Ltd ACN 152 378 133, Australian Credit Licence 414133 (“RMG”). RMG is a wholly-owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL and Australian Credit Licence 234945.

Aussie is a trade mark of AHL Investments Pty Ltd. Aussie is a subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124. ©2018 AHL Investments Pty Ltd ABN 27 105 265 861 Australian Credit Licence 246786.

By submitting this form, you agree to the finder.com.au Privacy and Cookies Policy, Terms of Use, Disclaimer & Privacy Policy and the Aussie privacy policy.

Aussie is both a lender and a mortgage broker, and offers a range of services.

  • FREE Suburb and Property Report with every appointment.
  • Access 3,000+ loans from over 20 lenders.
  • Get expert help with your loan application, including paperwork and eligibility.

Aussie Home Loans Lender Logos

The Adviser’s number 1 placed mortgage broker 5 years running (2013-2017)

Get more from Finder

Ask an Expert

You are about to post a question on finder.com.au:

  • Do not enter personal information (eg. surname, phone number, bank details) as your question will be made public
  • finder.com.au is a financial comparison and information service, not a bank or product provider
  • We cannot provide you with personal advice or recommendations
  • Your answer might already be waiting – check previous questions below to see if yours has already been asked

Finder only provides general advice and factual information, so consider your own circumstances, or seek advice before you decide to act on our content. By submitting a question, you're accepting our Terms of Use, Disclaimer & Privacy Policy and Privacy & Cookies Policy.
Ask a question
Go to site