Jun 22, 2021 3:01:38 PM

How Lenders Set Variable Interest Rates

Topics: Mortgage Broker, Home Loan Rates 0

With historically low interest rates, many Australian homeowners choose to structure part, or all, of their home loan on a variable interest rate. Fluctuations in the variable interest rate mean sometimes mortgage repayments are lower, while at other times a higher repayment is charged. If you’ve ever wondered why the variable interest rate differs from lender to lender, or even how variable interest rates are calculated, here’s a simple explanation.

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How are variable interest rates determined?

Variable home loan rates are based on the cash rate set by the Reserve Bank of Australia. On the first Tuesday of every month, the RBA announces the cash rate that will take effect the following day.

While each lender is permitted to set its own variable interest rates based on the RBA cash rate announcement, there are a few factors that influence how much of any change to the RBA cash rate is passed through to a home loan customer.

Other factors that may influence the variable interest rate lenders charge include:

  • How much it costs a bank to source funding: Lenders charge a higher interest rate than the interest rate it is paying to borrow funding.
  • The structure of the borrower’s deposit.
  • The risk profile of the borrower.

So, are you paying too much?

How often have you noticed lenders advertising new home loan products with interest rates lower than what you’re currently paying? Sure, the percentage difference may seem marginal, but that small difference in interest rates can make a significant difference to the cost of a mortgage over the long-term.

The fact is lenders typically adjust the pricing of their home loan products based on supply and demand. Which is why it’s so important to review a mortgage at least once a year, to ensure you are still getting the best deal available to you.

Many homeowners don’t bother to search for a better deal, instead choosing to remain with their lender for the life of their home loan to avoid the inconvenience of switching banks. And that complacency can end up costing. 

With a bit effort – and advice from knowledgeable mortgage professionals – homeowners can save thousands of dollars on their variable interest rate home loan.  

If you’d like to review your mortgage with a view to saving money on interest repayments, contact a Mortgage Express broker today. Simply complete this online form and a mortgage broker in your area will be in touch.


While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken by Finservice Pty Ltd (Mortgage Express) for any errors or omissions. This publication does not constitute personalised financial advice. It may not be relevant to individual circumstances. Nothing in this publication is, or should be taken as, an offer, invitation, or recommendation to buy, sell, or retain any investment in or make any deposit with any person. You should seek professional advice before taking any action in relation to the matters dealt within this publication. A Disclosure Statement is available on request and free of charge.

Finservice Pty Ltd (Mortgage Express) is authorised as a corporate credit representative (Corporate Credit Representative Number 397386) to engage in credit activities on behalf of BLSSA Pty Ltd (Australian Credit Licence number 391237) ACN 123 600 000 | Full member of MFAA | Member of Australian Financial Complaints Authority (AFCA) | Member of Choice Aggregation Services.