If You Get a New Variable Rate Loan Now, What Stops The Bank from Raising It All The Way up Anyway?

• 

  Nugs on 04/08/2022 - 10:33

  +8

  "competition"
  .

  • 

    SF3 on 04/08/2022 - 10:44

    +1

    It's also their way of saying they don't collude, without saying it.

  • 

    markathome on 04/08/2022 - 11:07

    +2

    Also let's say a big bank does this…

    A large chunk of customers cannot pay.

    So the bank puts all the defaulting houses on the market.

    The flood of supply reduces the house prices.

    The money from the sales comes back - it is less than expected. The liabilities - the money the bank owes to other banks (e.g. the banks with the customers who sold the houses) - exceeds their cash reserves. The bank declares bankruptcy.

    Executives triple-check they get paid. Investors go apesh*t. ASIC says well this is very unfortunate. But ultimately the executives realise they had a pretty cushy job had they just not pushed the envelope.

    • 

      xdigger on 04/08/2022 - 12:36

      +2

      I agree. ASIC execs then later retire in plump advisor roles in the banking industry John Barilaro-style.

      The financial industry and their political enablers aka Liberal party are the biggest rort ever on hardworking Australians. Thats why a independent federal corruption commission was blocked by Liberal in the last decade they were in charge. Hopefully a new federal corruption commission will be able to investigate crimes going back the last ten years and us regular citizens don't just hear about corruption only in the news like Barilaro NYC trade job scandal.

    • 

      dtc on 04/08/2022 - 17:37

      Also let's say a big bank does this… A large chunk of customers cannot pay.

      Said customers change to another bank. Bank avoids liquidation…

• 

  ShortyX on 04/08/2022 - 10:36

  +4

  very appealing to look at ~2% variable rates when my own rate is around 4%.

  My suggestion would be to use this as leverage for negotiating a better rate for your current loan, but make it a credible threat (even take a deeper look into switching providers).

• 

  AndyC1 on 04/08/2022 - 10:39

  +1

  The conditions in the contract you sign will either allow the back to change the rate and when. You need to read the contract to see what it has in it for rate changes, but generally they can go up and down so long as they give you X days notice and X may vary.

• 

  stirlo on 04/08/2022 - 10:40

  +6

  Who's advertising ~2%?

  Most companies I've looked at that were known for low rate loans are now somewhere between 3% and 3.5%…

  Nothing stops them increasing the rates and given the cash rate is 1.85% and banks were previously adding at least 1.5% to the cash rate to get their advertised rates anything below 3% will be an introductory offer and quickly be bumped up.

• 

  djones145 on 04/08/2022 - 10:41

  variable rate

  providing for changes in the interest rate, adjusted periodically in accordance with prevailing market conditions

  2% today, in 1 month time, first Tuesday of the month, up 0.5bp
  in Oct up 0.5
  in Nov up 0.5
  Dec (might get a break its Christmas)

• 

  [Deactivated] on 04/08/2022 - 10:41

  You're best to try and get a tracker mortgage which is tied to some base rate. Blindly trusting in your bank is … a matter of faith.

  The good news is most variable rate mortgages allow you to switch out without penalty. Perhaps that's the only thing preventing your bank from raising the rate too far.

• 

  netjock on 04/08/2022 - 10:51

  +1

  Keep churning for lower rates.

• 

  CyberMurning on 04/08/2022 - 11:20

  +3

  Q What Stops The Bank from Raising It All The Way up Anyway
  A none

• 

  spal on 04/08/2022 - 11:52

  With churning with another lender remember the refinancing comes at some further costs to the mortgagor. So, when churning take these into account. Most lenders are still offering decent cashbacks to offset most of these costs. Don't give your custom for free, make the lenders offer you something in return.

• 

  tsunamisurfer on 04/08/2022 - 12:20

  If you sign up to Variable, you accept all the movements in interest rates.

  The CBA ca move their rates to 5% today, they will find many of their customers will move or have zero new applications tomorrow.

• 

  toomuchdogfur on 04/08/2022 - 12:26

  +1

  Or would they use that 2.1% rate as a baseline, and only raise it in line with future increases from the RBA etc. (0.25%/0.5% at a time)?

  Yes this is correct. You'll find most banks have a "standard variable rate" buried somewhere in their T&Cs (which is the rate that changes in line with RBA announcements), but all the products they offer have lower rates than this due to fixed "discount rates" on the products. This is done so that banks can offer reduced rates to entice new customers but avoid offering those same reduced rates to existing customers.

  To illustrate it practically:
  1. You get your home loan for 4% (comprised of a standard rate of 5% less a 1% discount rate)
  2. Next year the bank advertises a 3% rate (standard rate 5% less 2% discount rate)
  3. As the bank's standard rate is still actually 5% and your loan's discount rate is still 1%, your existing home loan does not drop its rate at all

  But conversely, if you stay on top of your bank's new products and keep the pressure on them to give you the better discount rate when they offer one to new customers, you can keep striving for the best possible discount rate that will stick around for the life of your loan. It's a system that rewards the people who actively manage their finances (i.e. those who are most likely to pay attention to the competition and jump ship if it suits them) while milking those who don't pay attention.

  There technically isn't anything stopping the bank from changing your loan discount rate, but that would be very risky to their customer retention so I doubt they would try doing that.

  TL;DR: Find the best variable rate you can. It is very unlikely that rate rises will exceed RBA rises, due to reasons above.

  • 

    Mulga Bill on 04/08/2022 - 13:40

    +1

    I disagree in part (they don't only raise it in line with future increases from the RBA). I have worked for banks for the last 15+ years. Cost of funds is generally how banks calculate rates but the RBA cash rate is only one piece of the puzzle. For instance banks with high deposit base rely less on the RBA than those with little or no deposit base. But then the rates they need to offer on deposits to attract customers impact rates they can offer on home loans.

    So while rates will generally follow the changes to the RBA cash rate banks can do what they like with variable rates they offer customers.

    • 

      toomuchdogfur on 04/08/2022 - 14:19

      +2

      Ah yes, you are right… I phrased that last line badly. Increases can and do indeed happen independently of the RBA cash rate.

      What I meant to say is that once you have a loan product, it is very unlikely that rate rises will exceed those publicly announced by the bank.

      i.e. If your bank announces a 0.5% rate rise across the board, your loan rate will increase by that 0.5% even if you have a loan rate lower than what they are advertising at the time.

      • 

        avoidfullprice on 04/08/2022 - 17:07

        +1

        And we can all agree that if the rba cuts rate by 25bpt, we are likely to get less cut than that ;)