Will you save with the new rate-tracker home loan?
After the recent banking inquiry proposed rate-tracker home loans as a way to ensure customers saw the benefits from RBA rate cuts, at least one Aussie bank has taken the suggestion to heart.
Auswide Bank recently introduced a new RBA Rate Tracker Loan, which is available to owner-occupiers for loans starting at $150,000 and currently comes with a 3.99%pa interest rate.
The idea is that the loan rate will move up or down by the same percentage as the RBA cash rate, so borrowers will never miss out on an interest rate reduction again.
In theory, these tracking loans should be a good thing, ensuring that borrowers benefit from interest rate cuts in full instead of in part, or even not at all.
In practice, however, this kind of product hasn't been particularly popular in the past. Previous efforts include the QT Mutual Bank Rate Tracker loan, which was pegged at 290 basis points above the cash rate and lasted from November 2010 to May 2015. Loans.com.au offered a similar but even more shortlived product between June 2011 and October 2012.
So why hasn't the idea of an RBA-tracking loan taken off in Australia, and why are banking executives so reluctant about its chances for the future?
A major part of the problem is that these mortgages can pose a significant risk to lenders. When a loan is guaranteed to follow dips in the cash rate, banks need to build a higher buffer against the risk of rising costs in other areas, such as wholesale funding rates.
The result is that interest rates on tracking home loans could end up being uncompetitive, and customers could wind up paying more with one of these products than they would on a regular low rate loan.
An alternative may exist in products like the CUA Rate Breaker which tracks the average rate of the big four banks and offers a 1% discount off that figure (0.70% for investors).
But while this guarantees a more competitive deal than the big banks are offering, it still doesn't necessarily mean borrowers will be getting the best rate on the market.
For that, independent research on sites like Mozo and regular reevaluation of your mortgage's competitiveness may still be the best strategy.