One outcome of the recent House of Representatives Standing Committee on Economics’ inquiry into the four major banks (ANZ, Commonwealth Bank of Australia, NAB, and Westpac) was a call for Australian banks to potentially introduce “tracker” mortgages that peg the mortgage interest rate to a designated margin above the official cash rate.
While the suggestion met a mixed response from the bosses of the Big 4, one of Australia’s smaller institutions, Auswide Bank (formerly known as Wide Bay Australia) was quick off the mark, announcing on 14th October that it was introducing a new ‘rate tracker’ style home loan, promoted as the first of its kind in the Australian market. With an initial interest rate of 3.99% (comparison rate 4.01%), this represents a 2.49% margin above the current RBA official cash rate.
What is a rate tracker home loan?
A rate tracker home loan tracks the movements of the central bank (RBA) cash rate, plus a risk margin. If the RBA shifts interest rates up or down, the interest rate attached to the home loan also moves by the same percentage. As an example, if the official cash rate is 1.50% and the loan charges a margin of 2.50%, the home loan interest rate would be 4.00%. If the official cash rate falls by 0.25%, the home loan interest rate would also fall by 0.25%. Similarly if the official cash rate rose, the home loan interest rate would also rise accordingly.
“We identified an opportunity to create this new product”
Martin Barrett, Auswide Bank Managing Director said tracker mortgages are a popular loan product internationally particularly in Europe.
“The availability of tracker mortgages in Australia has been a topic at the current inquiry into the major banks having been highlighted by the parliamentary standing committee,” he said.
“As a small nimble bank focused on meeting a range of customer segment needs, we identified an opportunity to create this new product. 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.”
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. Despite their privilege and the uneven playing field we face, Auswide Bank remains committed to increasing competition and providing Australians with a viable alternative delivering value the majors are unwilling to provide,” he said.
Not first of its kind
Interestingly, while Auswide’s tracker mortgage appears to be the only one of its kind currently on the Australian market, it is worth noting that QT Bank (which was at the time Queensland Teachers’ Credit Union) introduced a Rate Tracker Home Loan a number of years ago. In fact it won a CANSTAR innovation award back in 2011 – but the product is no longer available. Bankwest have also previously offered a rate tracker loan.
How do tracker rates compare?
Auswide Bank’s Tracker Rate mortgage is available on new owner-occupied home loans of $150,000 or more for purchase or refinance with an LVR of up to 80% and includes the ability to make additional payments and redraw.
Currently on CANSTAR’s database there are 44 variable residential home loans available under the same conditions with an advertised rate of less than 3.99%, and 27 of those loans also have a comparison rate of 4% or less.
If fixed-rate loans are included, there are a whopping 334 residential home loans under 3.99%.
That said, a rate tracker home loan at least provides some competitive certainty for borrowers who don’t want to shop around.