How often do variable home loan rates change?

Lenders' variable rates are influenced by what’s happening in the markets, what the Reserve Bank is doing with its cash rate, and many other factors. It might be a few months or even years until you see interest rates change, or it could happen a few times a month— it’s not set in stone. 

As a borrower, it may be difficult to know if or when your rates may change. To better understand how often variable rates may change, you need to understand why they change in the first place, as this determines how often rates move up or down. 

So, why do variable home loan rates change? Here are a few causes: 

The Reserve Bank of Australia (RBA) changes the official cash rate 

Any change to the RBA makes to the official cash rate impacts lenders' wholesale funding costs, which are then often passed to borrowers. 

Generally, when the official cash rate falls, you can usually expect your lender to follow suit and drop their interest rates. Similarly, when the official cash rate rises, your lender is likely to raise their interest rates.  

The lower the official cash rate, the lower home loan interest rates generally are. 

The RBA is in charge of setting the official cash rate every month (except January). The cash rate is basically a barometer of the country’s economic health and influences how high (or low) home loan interest rates are. 

However, just because the RBA decides to adjust the official cash rate, it doesn’t necessarily follow that your home loan interest will move as quickly or even at all. This is dependent on your lender and how they fund their loans. 

Changes to the lender’s cost of funding 

Cost funding refers to how lenders source the money to lend to borrowers. They do this in a few ways, such as wholesale debt, bank deposits, the bank bill swap rate, and residential mortgage-backed securities (RMBS), as well as other funding sourced from the Reserve Bank like the Term Funding Facility and corporate bond purchases. 

Because many lenders rely on external sources of funds, interest rates may fluctuate as costs increase or decrease. When the cost of funding goes up, the interest rate on your variable home loan may rise as well. 

Regulatory changes can also impact variable rates 

Variable rate changes can also be due to regulatory changes made by the Australian Prudential Regulation Authority (APRA). The most recent regulatory change sees a strict limit on residential mortgage lending. Authorised deposit-taking institutions (ADIs) are allowed to lend up to 20% of their new mortgage lending at a debt-to-income ratio of six times or higher.  

Previous APRA restrictions included imposing increased restrictions on lending. APRA raised capital requirements for the banks. In order to meet higher capital requirements, home loan interest rates needed to rise. 

APRA also imposed restrictions on investment lending and loan-to-value ratios (LVRs) in 2014 and 2017, respectively. Basically, regulatory changes are there to make sure the banks aren’t lending to borrowers who can’t afford a home loan. That’s a good thing, because borrowers defaulting on their mortgage isn’t good for anyone or the economy, so sometimes that means interest rates will be higher. 

What do variable interest rate changes mean for home loan repayments? 

As you might have guessed, if your home loan rate is variable and goes up, your home loan repayment also goes up. The opposite is true, too. 

Even a few basis points' difference can mean the difference in hundreds of dollars on your repayment. 

If you haven’t reviewed your home loan for a while, it may be worthwhile to request a review. You could request a review of your existing loan rate with your current lender, or potentially refinancing elsewhere.

How to manage or prepare for interest rate changes 

There are a couple of ways to prepare for interest rate changes. You’re probably only concerned with rates going one way and not the other way. 

• If you’ve held a home loan for a few years, hopefully your lender has applied a few interest rate cuts to your home with market shifts. This is a great opportunity to continue what you were paying on your old rate, because if rates go up again, you may be better prepared to ‘weather the storm’, while also feeling good about getting ahead on your home loan. 
• Similarly, if your lender hasn’t passed on any interest rate cuts and you’re on a variable rate, either requesting a review of your rate with your existing lender or refinancing your home loan to a lower rate elsewhere can be a great way to claw back some savings.  

Even if interest rates go up, it’s worthwhile shopping around for a new home loan - chances are there may be a more competitive rate not far around the corner. 

As you can see, there are many factors that can influence how often variable rates change outside of changes made to the official cash rate. If you want to know more about variable rate home loans, get in touch with loans.com.au today! 

Other helpful resources:

Guide to variable, fixed and offset home loans
What is a comparison rate and how is it calculated?
How is interest on a home loan calculated?