Tracker mortgages ‘should not be mandated’

As of this week, Auswide Bank has made available a home loan that increases and decreases in line with the Reserve Bank of Australia’s (RBA) monthly interest decision.

The bank’s new RBA Rate Tracker Home Loan tracks the movements of the cash rate, so that if the RBA shifts interest rates up or down, the interest rate attached to the home loan will move by the same percentage (however, the loan has a fixed margin floor of 2.49 per cent should the cash rate fall below 0 per cent).

The launch of the loan is timely, as the House of Representatives Standing Committee on Economics’ recently asked the big four banks (ANZ, Commonwealth Bank of Australia, NAB, and Westpac) about the applicability of bringing in tracked mortgages into the Australian market in a bid to “protect customers from interest rate fluctuations that are not genuinely caused by changes to the bank’s cost of funds”, and “offer customers greater transparency and reassurance by behaving as customers expect variable rate mortgages to behave”.

At the inquiry, Liberal MP David Coleman raised the prospect that Parliament could force the banks to offer such a loan.

‘Better off taking that leadership role ourselves’

However, speaking to Mortgage Business following the launch of the product, Auswide Bank’s managing director, Martin Barrett, said he “would not want a circumstance in Australia whereby regulators or politicians went down the path of imposing a product like this on us”.

He explained: “We [the banking industry] would be far better off taking that leadership role ourselves and getting our own processes in place to manage the risk and also to provide a product that might have some appeal.

“I think when [a product] gets mandated, then generally there can be risks associated with that, which can include an onus level of reporting, overkill in red tape and so forth, and maybe even a level of good intent but slightly misguided in terms of the way the product may actually be structured.

“So I don’t think these should be mandated, because as much as anything else, as an industry we have to show some leadership and be shown to be responsible in terms of our approach to the market place and responsible to our customers.”

He continued: “If there is demand for this product and that transparency for these interest rates is seen as something that is important, then as an industry well-managed, I think we can have that opportunity out there for customers.”

Uncertain market size

When asked why the bank decided to launch this product, Mr Barrett said that the timing (in relation to the recent attention tracker mortgages have been getting politically) was “fortuitous”, but that the bank had been “working on a product of this type for a little while”.

He said: “We look at a whole range of different products and are constantly thinking: 'What's potentially going to be a product in a very commoditised market that may have some appeal?' On the minds of some people is the transparency around their interest rate movements for their current variable rates. We felt able to provide into the market place what is, at the moment, a unique product that gives customers more transparency about what will happen to their particular interest rates.”

However, Mr Barrett said that the product “won’t be for everyone”. “Just as quickly as the rates can move down, they can move up as well,” he said.

“It's certainly a product that will appeal to some, but what sort of size market there is for it, we don’t know. I guess we'll find out over the weeks ahead.”

According to the Auswide MD, the product will be carefully managed to ensure there is “balance”.

He explained: “Could Auswide Bank service the needs of Australia in this particular product? The answer for that is no, we couldn’t.

“We need to make sure that the product as a percentage of our overall portfolio is in balance, like we do with other products we put out there, so that we protect against any potential and substantial exposure risk in the event of a substantial meltdown in interest rates in Australia ... not that we expect that to happen.”

RBA Rate Tracker Home Loan details

The home loan is available on new owner-occupied P&I home loans of $150,000 or more for purchase or refinance with an LVR of up to 80 per cent, and includes the ability to make additional payments and redraw.

There is a low, upfront establishment fee of $300 and no ongoing monthly service fee; however, a transaction account needs to be held by the customer with the bank.

Currently, the loan has a variable interest rate of 3.99 per cent per annum (comparison rate 4.01 per cent per annum).

However, the Queensland-based bank has said that if the RBA cash rate falls to 0 per cent or below in the future, the customer would continue to pay the fixed margin floor of 2.49 per cent.

[Related: No ‘viable market opportunity’ for tracker mortgages]