Weeo, weeoo, weeoo:
What a funny little business the sudden interest in “tracker home loans” is – an apparent desire to have a home loan that immediately follows Reserve Bank cash rate movements just when there’s a very good chance the next RBA move will be up.
…It’s an oddity that some members of the House of Representatives economics committee displayed such interest in tracker loans. That they thought it was important suggests they didn’t quite understand that, on average, we pay the interest rate that the RBA wants us to pay and never mind whether the banks trim or add a little around the edges.
The RBA, understanding the banks’ funding mechanisms, factors in the possibility that mortgage rate movements might not always match cash rate movements.
…Pitched at 3.99 per cent, the Auswide Bank’s tracker loan is initially more expensive that what most people should be paying for a home loan now. It would only become competitive if the RBA continues to cut rates.
…there are hints that the RBA would prefer not to cut further, that it’s hoping the US Federal Reserve will lift its rate a bit and thus do the work for the RBA on the rate differential.
And consider this: Is Scott Morrison so silly that he would go on the record saying he was opposed to further RBA rate cuts if he thought there were more in the offing?
Well, the only worse idea that I can think of versus following The Pascometer is following Scott Morrison.
Still, it is worthwhile question. Are tracker loans an opportunity to arbitrage interest rates? Given the MB outlook is for rates to fall to 50bps at minimum and even possibly to zero if the world is bonkers enough to keep giving us their savings then, yes, there very well could be.
If rates do fall as The Pascometer suggests, then two things are likely:
- the first is that bank offshore funding costs are rising, and
- second, the banks will be unilaterally raising rates to offset the margin crush.
There are other reasons to expect ongoing bank margin squeezes too:
- regulatory tightening raising capital requirements;
- further macroprudential as the currency war rages, raising bank rates even as the RBA cuts;
- bad loans rising and
- excessive payout ratios.
In the worst case scenario of Australia facing a decent current account adjustment then the RBA might be forced to hike rates but it’s unlikely to be more than the banks are doing.
Tracker mortgages don’t seem a bad options at all.
More interesting is if rates do fall to zero, or close enough, and wholesale money spreads are blowing out, then how on earth is the tracker mortgage going to make any money for the issuing bank?
I’d be reading the fine print!
