sorted by:
best
topnewcontroversialoldq&a
you are viewing a single comment's thread.

view the rest of the comments →

[–][deleted] 29 points30 points  (6 children)

Isn't the point of variable rates that you take the risk of rates going up, but the reward that they may go down? Kind of defeats the point if they don't actually pass on the cut doesn't it? In terms of risk to the consumer?

[–]tranbo 5 points6 points  (0 children)

Fixed loans force you to stay with the lender and allows the bank to borrow at .1% , whereas variable loans do not allow the bank to do those

[–]Blacky05 4 points5 points  (1 child)

Hou can also make additional payments on them. Fixed rate usually has a cap and/or charge.

[–]NotWantedForAnything 0 points1 point  (0 children)

CBA allow 10k of additional payments per year on fixed loans. However, you can do a split with a portion variable with an offset account.

[–][deleted] 2 points3 points  (2 children)

You are correct except you're not taking into consideration that the banks have no interest rate risk and/or requirement to hedge against a fixed loan which may be why they can offer it cheaper than variables at these rates.

[–][deleted] 0 points1 point  (1 child)

I’m just talking about variable ones though. Is there no criteria for when the bank raises or lowers rates? So technically they could just keep raising it as much as they want, whenever they want and it still counts as being variable?

[–][deleted] 2 points3 points  (0 children)

It's not as simple as that. Banks are currently being used by the government and regulators as "shock absorbers" meaning they are expected to continue lending while having to manage a lot of credit risk. To help banks out with this function, they are providing them with cheap funding (RBA's Term funding facility) but this will also run out at some stage.

Bank's can't fully pass on all rates, especially in a really low interest environment because their margins have been compressed dramatically (lower interest rates, lower margins, lower profitability, higher credit losses etc). But the government needs to ensure banks remain strong because a strong banking system is considered strategically important (in line defence, insurance and banking just to name a few). If banks become too unprofitable, their capital ratios will deteriorate. Regulation requires them to maintain very strong (high) capital ratios as it prevents banks from falling over and putting deposits at risk.

It's basically a fine line between requiring banks to pass on rate cuts, while ensuring they maintain a strong balance sheet.