Article by Mozo
If you’ve been following the banking inquiry news, you might have heard the term rate-tracker loan thrown around. The introduction of more rate-tracker loan products was suggested as one reform that could help Aussies and their banks get along a little better.
But what exactly are we talking about when we say a home loan is a ‘rate-tracker’? And more importantly, is it actually a good deal? We’ve collected all the need-to-know facts about rate-tracker loans so you can make an informed decision.
A rate tracker loan is just what it sounds like — it’s a variable rate home loan, but it’s interest rate is pinned to the official RBA cash rate. That means that when the RBA increase or decreases rates, the interest rate on a rate-tracker loan will increase or decrease by the same amount.
It doesn’t mean that you’ll be getting a home loan at the same interest rate as the RBA cash rate. The rate-tracker interest rate will stay at a constant level above the cash rate — often 2-3% above.
If you’re thinking that that sounds an awful lot like any other variable rate home loan, you’re right.
But there’s a key difference: although interest rates on variable rate products are theoretically dependent on the RBA cash rate, there’s no guarantee banks will make changes in line with the RBA. They aren't actually required to follow RBA changes, which is why, when rates change, you might not actually see a difference in your home loan repayments.
If you had a rate tracker home loan, then your interest rate is guaranteed to change the same amount as the RBA rate did, and at the same time.
There’s nothing new under the sun and this is no different. The idea of a rate-tracking loan has been around for some time, but while it’s still pretty popular in the UK, it never really took off in Australia.
QT Mutual Bank gave it a go with their Rate Tracker home loan, which was pegged at 290 bp above the official cash rate. That means that if the RBA rate was 1%, it would have an interest rate of 3.90%. This loan was available from November 2010 to May 2015.
The only other example we came across was Loans.com.au’s Dream Loan Express Rate Tracking loan, which was linked to the RBA cash rate for the first three years of the loan. It was pretty short lived, and only lasted from June 2011 to October 2012.
If you’re keen to get on the Rate-tracker mortgage trend, then there isn’t much to choose from just yet. Banks have been slow to jump on rate-tracking loans, because they’ve always had problems with offering a Rate-tracker loan that’s a competitive deal before, which is one of the downsides, discussed below.
But there is one option: Auswide Bank recently introduced an RBA Rate Tracker Loan. It’s available to owner occupiers for amounts starting at $150,000, and at the time of writing, comes with a 3.99% interest rate. That’s not a bad deal, but at the moment, there are plenty of offers with interest rates below 4% — so you might want to shop around before settling.
Update: ANZ CEO Shayne Elliott recently said that the Big bank was considering its own rate-tracker product, but that it would likely come at a premium, due to the higher risk involved for the bank.
There are a few reasons why a rate-tracker loan might be a good fit for your home loan, including:
On the other hand, there’s a reason why rate-tracker loans aren’t all that popular among Aussies.
If you like the idea of a rate-tracker home loan but you’re leery of getting stuck with a higher rate, then check this out:
The CUA Rate Breaker, is a variable rate home loan that tracks the average Big 4 Bank rate and offers a 1% discount off it (0.70% for investors). It’s a good alternative to a Big 4 loan, since you’re guaranteed to get a more competitive deal than they’re offering, but remember that it doesn’t necessarily mean you’ll be getting the best rate on the market.
If you’re after a home loan that will save you money in the long run, the best strategy is to do your own research, compare the mortgage offers on the market and find a product that suits you.Home loan features guides