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Mortgage tracker rates follow the cash rate.

Business Briefing: rate tracker mortgages

Business Briefing: rate tracker mortgages. The Conversation16.3 MB (download)

In the ongoing debate about the transparency of Australia’s big banks, the idea of rate tracker mortgages has been gaining traction. This is a mortgage that is tied to the cash rate set by the central bank (in Australia, the Reserve Bank of Australia), with an additional fixed margin set by the lender (usually a bank).

The rate follows the ups and downs of the cash rate, similar to what already occurs in short term lending markets like the bank bill swap rate (the rate at which banks lend each other money), says Professor Milind Sathye, from the University of Canberra.

When it comes to applying this same idea to mortgages, customers have more certainty because they know when the Reserve Bank moves rates, their rate will also move in line with this, Sathye says. The risk lies in the parameters banks may put around these types of loans, with additional fees or a floor rate.

Even though Australia’s big four banks haven’t been too keen on the idea, Sathye says this type of mortgage would provide a solution to the problem of trust in the banks. In addition he says it would force banks to be more efficient, to contain their costs given that the margin charged on top of the tracker mortgage rate remains fixed.

Listen at the end of this podcast for our first “Ask an Economist” segment, where Vital Signs’ Professor Richard Holden answers any economic questions you want to ask.

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