Why did my home loan interest rate change?

Rates and fees last updated on

Banks can change their rates for a variety of reasons, and the Reserve Bank's cash rate decision is just one of them.

The Reserve Bank has remained on the sidelines since May of last year, with the cash rate remaining at 2%. In spite of this long period of inactivity, home loan rates have been anything but static. 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. Below are a few of the reasons you might find your home loan interest rate changing.

The Reserve Bank cash rateWhy did my home loan interest rate change

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.

A variety of factors influence the amount banks pay for wholesale debt. While the cost the RBA charges banks for overnight loans factors into a bank’s overall funding costs, it’s far from the only influence. 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.

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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.
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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. But 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.

Compare the latest home loan rates

Rates last updated December 13th, 2017
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Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.69%
4.86%
$0
$395 p.a.
90%
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3.58%
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3.62%
3.62%
$0
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A discounted, competitive variable rate loan with limited fees.
3.64%
3.66%
$0
$0 p.a.
80%
A home loan with a competitive variable rate, limited fees and plenty of flexibility.
3.64%
3.67%
$0
$0 p.a.
80%
A low rate home loan with no ongoing fees.
3.54%
3.56%
$0
$0 p.a.
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For new home buyers only. No refinance option. A low interest variable home loan with no application fee and free redraws. Offer ends 2 January.
3.65%
3.66%
$0
$0 p.a.
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A competitive variable rate home loan with no application fee.
3.69%
3.69%
$0
$0 p.a.
90%
A special limited time offer for owner occupiers. An IMB Transaction Account must be opened with this loan.
3.99%
4.62%
$395
$0 p.a.
80%
Fix your interest rate and pay principal and interest repayments on your investment.
3.69%
4.01%
$0
$299 p.a.
95%
A loan with no application fee and borrow up to 95% LVR.
3.44%
3.45%
$440
$0 p.a.
80%
This variable loan has a sharp rate, low fees, flexible repayment options and an offset account. This loan is available for PAYG borrowers only.
4.14%
4.14%
$0
$0 p.a.
80%
An investment home loan with competitive rate and 100% offset account.
3.74%
3.74%
$0
$0 p.a.
80%
Pay no application fee or ongoing fees with this loan.
3.68%
3.83%
$0
$10 monthly ($120 p.a.)
80%
A low interest rate home loan that allows borrowers to borrow up to 80% of the property value.
4.64%
4.01%
$0
$0 p.a.
80%
Enjoy a fast application process and flexible repayment options with this fixed rate investment loan.
3.64%
3.64%
$0
$0 p.a.
70%
A low-rate basic home loan requiring a 30% deposit.
4.09%
4.11%
$0
$0 p.a.
90%
Access a fee-free offset account and a special interest rate for investors.
4.79%
5.44%
$0
$395 p.a.
90%
Package your 4-year fixed rate investment loan and pay no application fees.
3.99%
4.00%
$0
$0 p.a.
80%
A low-fee variable rate investor loan with a fast online application process.
3.64%
4.03%
$0
$395 p.a.
80%
Apply for a new owner occupier loan or refinance from another lender and receive this discounted rate.
3.65%
4.84%
$0
$395 p.a.
90%
A 2 years fixed platinum package that has $0 application and a loan redraw facility.
3.65%
4.19%
$500
$0 p.a.
95%
Get a discounted fixed interest rate for the first 12 months while you settle into your new loan.
3.79%
4.11%
$0
$299 p.a.
80%
A fully featured home loan with an offset account and discounts available.
3.72%
3.74%
$0
$0 p.a.
80%
Take advantage of a 100% offset account along with no annual or application fees.
3.72%
3.75%
$600
$0 p.a.
80%
A maximum 80% LVR home loan with no ongoing service fees and a linked transaction account.
3.94%
4.88%
$0
$0 p.a.
90%
Enjoy a low interest rate and borrow up to 90% (with LMI) of your property's value.
3.69%
4.15%
$395
$0 p.a.
80%
A one year fixed rate offer with no ongoing bank fees.
3.97%
4.02%
$445
$0 p.a.
90%
Get a competitive rate without features you may not use.
3.99%
4.02%
$600
$0 p.a.
90%
Take advantage of a 0.60% discount on your rate, a 100% offset account and no ongoing fees.
4.09%
4.11%
$0
$0 p.a.
80%
A low variable rate loan with no application or ongoing fees.
3.85%
4.18%
$500
$0 p.a.
95%
Apply for Easy Street fixed rate home loans and get a competitive loan with a fixed interest rate.
3.96%
3.98%
$0
$0 p.a.
90%
Take advantage of a redraw facility, competitive variable rate and no application or settlement fees for a limited time.
3.72%
4.19%
$0
$0 p.a.
80%
Enjoy a variable 3 year introductory rate with the Bankwest Equaliser Home Loan.
3.84%
4.83%
$0
$0 p.a.
95%
Get a competitive 2-year fixed rate with no application or ongoing fees.
3.88%
4.89%
$0
$395 p.a.
95%
A fixed rate package with flexible repayment options. 350K NAB Rewards Points offer available. Terms and conditions apply.
4.04%
4.07%
$0
$0 p.a.
80%
Access the equity in your home with a competitive interest-only rate and no application fee.
3.97%
3.97%
$0
$0 p.a.
90%
A competitive variable rate home loan with no ongoing fees.
3.73%
3.73%
$0
$0 p.a.
70%
A special low variable rate for owner occupiers with 100% offset account and no application or ongoing fees.
$0
$0 p.a.
A basic low-rate home loan that still offers some useful features.
3.74%
3.74%
$0
$0 p.a.
95%
A low rate home loan with no application or ongoing fees. Note that to be eligible for this loan you must be QLD resident.
4.19%
4.19%
$0
$0 p.a.
90%
Access to redraw facility and offset account without the annual fee.
3.68%
3.69%
$0
$0 p.a.
95%
A no frills loan with a competitive rate and a maximum LVR of 95%.
3.64%
3.78%
$0
$10 monthly ($120 p.a.)
80%
A competitive variable rate home loan with flexible features. You can earn 30,000 Velocity Points for every $100k you borrow (for a limited time, subject to eligibility requirements).
3.87%
3.92%
$0
$0 p.a.
90%
A low rate variable home loan offer with no monthly fees or application fee charge.
3.87%
3.87%
$0
$10 monthly ($120 p.a.)
90%
Get a competitive interest rate for 3 years and a discounted variable rate when the fixed period ends.
3.69%
3.69%
$0
$0 p.a.
70%
Enjoy a low variable rate with no application and ongoing fees.
3.79%
3.80%
$0
$0 p.a.
80%
A competitive rate with no ongoing monthly fees or application fees.
3.99%
4.03%
$0
$0 p.a.
95%
Enjoy a basic home loan with a high LVR and no application or ongoing fees.
3.85%
4.95%
$0
$395 p.a.
95%
A discounted package rate for owner occupiers with the ability to package a Qantas rewards earning Amplify credit card. $1,500 cashback available for refinancers. Conditions apply.
3.99%
4.99%
$0
$395 p.a.
95%
A package home loan with fee free extra repayments available during the fixed term.
4.39%
5.42%
$300
$10 monthly ($120 p.a.)
95%
Lock in a competitive fixed rate for 3 years.
3.69%
4.03%
$0
$299 p.a.
80%
Enjoy a low variable rate with no application fee.
3.59%
4.42%
$0
$0 p.a.
95%
This competitive introductory rate is a limited time offer for new owner-occupiers
3.68%
3.69%
$600
$0 p.a.
90%
Get a low variable rate along with some important basic features.

Compare up to 4 providers

Adam Smith

Adam has more than five years of experience writing about the Australian home loan market.

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