Q: As a homeowner with a decent sized mortgage I was personally happy to see that the RBA cut the cash rate again this month. However, over the last few weeks I’ve noticed that many lenders aren’t passing on the full .25% cut, including my own. Why don’t banks pass on the full rate cut?
A: This is a very good question especially in the current market, though there isn’t a simple answer.
The bottom line is that the RBA cash rate isn’t the only way lenders work out what their home loan interest rates are. There are different elements that are factored in when setting interest rates, and these are largely connected to funding costs which, basically, are what it costs a lender to provide you with your home loan.
A bank or lender’s own internal Treasury is a key component of this. It provides funds, but where it get these funds from can make a difference, e.g. retail financial markets funded from deposits like savings accounts and term deposits, or wholesale markets from larger financial institutions.
Lenders also consider factors such as the difference between the cash rate and their different short and long term borrowing costs, risk and swap rates (which help define fixed interest rates). These aren’t easily explained, but they fluctuate in isolation from the cash rate and impact a lender’s funding cost on top of the cash rate to your variable home loan.
Additionally, lenders also assess risk and interact with these various funding sources differently, so this is partly why interest rates (and the cuts they pass on) differ between lenders.
One of the most important things is for lenders to try and maintain the balance between sustainable and competitive pricing. If they consistently passed on rate cuts over time irrespective of these other costs and factors, their lending may become unsustainable, especially if market conditions decline. Likewise, if lenders charge borrowers too much then they won’t be competitive and they will lose business.
Sustainability is key.
Do you want to ask John a question? Submit it here and check back each Sunday to see if it’s been answered.
If you found this article useful please share it using the buttons below.