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What is a rate tracker home loan?

What is a rate tracker home loan?

In recent weeks, talk has been heating up about a particular kind of mortgage known as a rate tracker loan.

Popular overseas, especially in Europe and the United Kingdom, these loans pledge to faithfully track the cash rate set by the RBA.

For frustrated customers, who are sick of seeing the RBA cut rates only to find their lender will not be passing on the full cut, these loans may seem like a breath of fresh air.

They’re also gaining support from ASIC with the chairman, Greg Medcraft telling the Australian Financial Review in an interview last week that he wants to see more of this type of loan in the Australian market.

“These rate tracker mortgages are very popular overseas because the consumer knows there is a fixed margin earned by the bank over the life of the loan,” said Medcraft.

“The problem in Australia at the moment is there is a double jeopardy with standard variable rate loans.

“You don’t know how your SVR [standard variable rate] will move and all the SVRs are not the same. I think the banks like the confusion in the market.”

Rate tracker loans promise a guaranteed reduction of the interest rate by the full amount the RBA cuts their own rate. This does work both ways though so borrowers should be prepared to see their rate rise accordingly when the cash rate does go back up.

So far, there are only a few lenders offering rate tracker loans in Australia and they tend to be among the smaller more competitive lenders.   

Auswide Bank released a new rate tracker style loan last week which will be available for owner-occupier borrowers who are borrowing a minimum of $150,000 from today.

Martin Barrett, Managing Director at Auswide Bank said they were pleased to introduce this loan to increase transparency and competitiveness in the mortgage industry.  

“It meets the needs of a group of borrowers who prefer a variable rate but value certainty and transparency about how much they will pay for their home loan and when interest rate changes will be passed on,” said Barrett.

Mr Barrett said the Australian lending landscape is dominated by the ‘big 4’ who are privileged in respect to their cost of funds and regulatory capital position.

“These are the areas that need attention if we are serious about improving competition in the Australian banking landscape. It was pleasing to see the Chairman of ASIC call this out.”

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