The rate of interest on variable rate home loans fluctuates and often changes multiple times over the course of the home loan’s term. Because variable rate loans are linked to market interest rates, variable rates are exactly that: variable. So, how frequently does ‘quite a bit’ occur, and why do they vary?

These market changes might occur as frequently as once a month, or once a quarter or once a year. Variable-rate loans will alter monthly, quarterly, or annually as a result. Variable rates are also subject to change at the discretion of the lenders. But why is that?

The short answer is that market changes have an impact on lenders’ decisions about how to establish home loan rates. Variable rates can alter as a result of these adjustments.

The lengthy version: Lenders evaluate a number of factors when determining where to set their home loan rates and whether to raise, lower, or retain them. But what exactly are these variables, and how do they influence the change?

To comprehend how frequently variable rates vary, you must first comprehend why they fluctuate in the first place, as this influences how frequently rates rise or fall. So, what causes variable rates to fluctuate?

1. The official cash rate is adjusted by the Reserve Bank of Australia (RBA)

Because any change in the RBA’s official cash rate affects lenders’ judgments on how to set their house loan rates, this is certainly one of the most important factors that dictates how often variable rates shift.

When the official cash rate falls, you should expect your lender to follow suit and lower their interest rates as well. When the official cash rate rises, your lender’s interest rates are likely to climb as well.

Every month, the RBA is in charge of determining the official cash rate (except January). The cash rate is essentially a measure of the country’s economic health, and it has an impact on how high (or cheap) interest rates are on home loans.

However, just because the RBA decides to change the official cash rate doesn’t mean your home loan interest rate will change as well.

2. Banks must satisfy their stockholders

Banks, understandably, want to keep their customers satisfied. They must, however, consider their stockholders. To do so, banks must ensure that they have a good return on equity (ROE).

The return on equity (ROE) is a measure of how effectively shareholder money is being utilised to generate profit for banks. Hiking interest rates, for example, increases a bank’s earnings, and more profit means happier shareholders. Lowering interest rates, on the other hand, affects a bank’s earnings, which is bad for shareholders but good for customers.

Banks must also explore ways to increase their customer base. Lowering interest rates can help, but they must also keep their current clients satisfied. They may migrate to another bank if they decrease interest rates for new customers but not for existing ones.

3. Banks must also reimburse their expenses

Without going into too much tedious detail, banks profit by lending money at a greater rate than they borrow it. Wholesale debt, deposits (the money in your bank account), the bank bill swap rate, and residential mortgage-backed securities (RMBS) are some of the ways banks get their money.

When the cost of borrowing money from any of these sources rises, banks must raise their interest rates to compensate the additional costs.

4. Variable rates can also be affected by regulatory changes

The Australian Prudential Regulation Authority (APRA) tightened lending regulations in reaction to the global financial crisis (which was primarily attributed to banks in the United States giving out home loans and lines of credit to just about everyone). The Australian Prudential Regulation Authority (APRA) increased the capital requirements for banks. Home loan interest rates frequently need to climb in order to meet higher capital requirements.

Essentially, regulatory restrictions are in place to ensure that banks do not lend responsibly to customers who are unable to repay their loans.

Last but not least

As you can see, a variety of factors other than changes in the official cash rate can influence how frequently variable rates change. Stakeholders must be considered, expenditures must be covered, and customers must be satisfied.

Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.