Tracker mortgages not mandatory, report reveals

by AB28 Nov 2016
Tracker mortgages have not been made mandatory, the House Economics Committee report released last week revealed, as part of the parliamentary inquiry into the major banks.

Tracker loans would mean banks’ committing to a set rate above the Reserve Bank cash rate, essentially ‘tracking’ the rise and fall of the cash rate over time.
But the report did not mandate banks offer tracker mortgages to customers, the Australian Financial Review reported.  

Speaking to Australian Broker, AMP Capital head of investment strategy and chief economist, Shane Oliver said, “I think having tracker mortgages makes sense but I don’t know whether it should be forced on the banks.

“The benefit of tracker mortgages I suppose is that they give some certainty to home borrowers relative to the cash rate.”

But he said providers of the product will want to cover the risks involved.

“The main risk is that the cost of funding to the bank diverges from the cash rate and they would therefore have to try and price that risk in, in setting the margin. 

“The danger is that (the banks) come up with a margin relative to the cash rate which is overly high and therefore a home borrower then may find that they were better off sticking to the … variable rates and just seeking out the best deal they can get from the bank.

Although he said the banks will offer it if there’s consumer demand for it. “The banks at the end of the day don’t want to lose customers.”

Tracker mortgages could also benefit banks as Oliver said, “you could argue, if the pricing is right, then it might give the bank a bit of certainty as well.

If the banks decided not to pass on a cash rate reduction in full, there is the tracker rate as another option. “It enables them to offer something different to their customers,” he told Australian Broker.

Only Auswide Bank has offered tracker mortgages so far but Oliver expects more lenders may offer tracker mortgages in the future, saying “there would be a portion of the mortgage market that would find these sorts of loans quite attractive.  

“There are reasons why it could take off – whether it will or not remains to be seen

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