Are they really what they’re cracked up to be?
With a rate tracker home loan, you can potentially save thousands when the Reserve Bank of Australia (RBA) cuts its cash rate.
These home loans aren’t new and they’re a gimmick that lenders don’t offer for very long.
The question is are they really worth it in a low-interest rate environment and what happens when the cash rate lifts?
How does a rate tracker home loan work?
Like a standard mortgage, the interest rate offered on the rate tracker home loan is the RBA rate plus a margin.
This margin covers the bank’s cost of funds and varies between lenders.
Once the loan is set up, your mortgage will move by the same percentage as any change made to the official cash rate.
So the variable rate itself doesn’t match the RBA but instead tracks the percentage change.
Depending on your lender, your interest rate will change within two working of an RBA announcement.
Call us on 1300 889 743 or complete our free assessment form to find out if you qualify for a rate tracker home loan.
How much are you saving?
Let’s say your variable interest rate is 4.10% and the RBA announced a rate cut of 0.25%.
Your home loan rate would be reduced to 3.85%.
For a $500,000 loan on a 30-year term, you’re saving almost $72 a month or over $860 in a year.
Most lenders and even fewer of the major banks don’t actually pass on the full RBA rate cut to their customers.
Try out the home loan repayments calculator to find out how much you could save just by getting a sharper interest rate.
Is this new to Australia?
Rate tracker home loans have been offered by lenders in the past as a way to attract customers when interest rates are low. Competition between the banks can be fierce.
Because of that, they don’t tend to stick around for long either.
In 2009, BankWest sold a so-called “rate tracker” mortgage but the only thing it tracked was the average standard variable rate of Commonwealth Bank of Australia (CBA), ANZ, Westpac and National Australia Bank (NAB).
Why have they made a comeback?
“Comeback” is probably a strong word.
Only one or two lenders are actually offering these rate tracker mortgages with one of the major banks considering their own version.
It comes after these loans were “endorsed” by the Australian Security and Investments Commission (ASIC).
In October 2016, ASIC chairman Greg Medcaft told a House of Representatives’ standing committee on economics that rate tracker mortgages should be offered by all lenders in Australia.
Medcaft said that it would end the lack of transparency and help to keep banks honest when rate cuts were announced.
It comes after similar products were introduced in Europe and the UK. In short, they were a disaster.
Overseas banks nearly went bankrupt because they were tracking too close to their central bank’s cash rate.
The cash rate isn’t the banks’ real cost of funds so they were taking on a lot of risk themselves.
Is it all smoke and mirrors?
There are few more drawbacks to consider before going down the rate tracker home loan path.
What happens when rates are hiked?
Rate tracker home loans can be a huge win when the cash rate is cut but when rates are hiked, you’ll suffer.
In addition to this, there’s no telling how long the RBA will keep the official cash rate low or whether they’ll cut or lift the rate in the near future.
Beware of the floor rate
These loans tend to come with a floor rate which means that the lender won’t simply track the RBA rate indefinitely.
So if the RBA cash rate falls to 0% or below, you’ll still have to pay a fixed margin that the lender has set.
You could actually be paying more!
You could actually end up paying more with a rate tracker mortgage than a standard variable home loan.
The reason is that the bank’s cost to fund a mortgage doesn’t just come from funds in Australia. They come from overseas as well.
Because of that, the variable rate is set at a higher buffer than normal to cover their actual cost of funds.
This is otherwise known as a “floor rate”.
You’ll have to move fast
Lenders would likely limit the number of rate tracker home loans they write so you’d have to move fast to apply for one.
You may miss out on some features
It’s likely that rate tracker mortgage wouldn’t have all of the features offered on other types of loans such as an offset account.
Am I better off getting a cheaper interest rate?
Usually, yes.
Speak to a mortgage broker who can compare home loans from a number of different banks and lenders.
Our brokers are credit experts that can negotiate rate discounts that aren’t available to the general public.
You also have to consider more than just the interest rate. There are other fees that could be reduced or waived, saving you thousands over the life of your loan.
Ask us about a rate tracker home loan
Let us fully assess your situation and let you know if a rate tracker home loan is right for you.
There are plenty of fixed rate options that you could take advantage of right now!
Call us on 1300 889 743 or fill in our online enquiry form today.
