Millions of Australians know the frustration of grappling with home loans with unpredictable interest rate fluctuations. Fortunately, the government is stepping in.

Pressuring major lenders to introduce tracker mortgages is likely to be a key recommendation of the current federal parliamentary inquiry into the Big Four. Already available overseas, tracker mortgages are variable-rate home loans with interest rates that rise or fall in line with a benchmark rate. These types of mortgages are very popular in the United States, Europe, and the United Kingdom as they offer rates that are often cheaper than other mortgage products.

Tracker mortgages could potentially help millions of Aussie homeowners who suffer because the Big Four refuse to pass on Reserve Bank of Australia (RBA) rate cuts. Currently, no Aussie lenders offer home loans that track the RBA cash rate.

The case for the forced introduction of tracker mortgages into the Australian market has received a significant boost following an endorsement from the nation’s top regulator. Australian Securities and Investments Commission (ASIC) chairman Greg Medcraft has voiced his support for tracker mortgages. Medcraft recently told the House of Representatives’ standing committee on economics that the products would offer consumers clarity and transparent pricing.

“We’re in a market that is, frankly, an oligopoly...I think the reason we don’t have them today is because there is a lack of competition,” Medcraft said. “Where you do have competitive markets, whether it be in Europe or Ireland or the UK, clearly you do have tracker mortgages.”
 
The Big Four have opposed tracker mortgages, maintaining that their formula for setting mortgage interest rates is independent of fluctuations in the RBA’s rate. Also, banks in countries where tracker mortgages are popular have access to a large pool of funding in the form of deposits. In contrast, Australian banks rely on wholesale markets to raise funds from overseas banks where deposits are more abundant.
 
Medcraft has rejected the banks’ reliance on this line of argument, as he believed there was no reason they could not hedge back to the cash rate. “I can understand the banks’ point of view, where [it’s] great to have a system where you can charge borrowers whatever you want,” he said. “But it hurts them in certain respects, because if they don't pass on the full reduction — or they actually charge more — I think they do actually suffer in terms of their reputation.”

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