The big banks could drop their variable rates much lower, but by how much?
Many Australians, towards the end of every month, face the sometimes daunting task of making repayments on their principal and interest variable rate home loan.
Have you ever stopped and asked yourself how a bank works out what that variable rate should be?
And once you've worked that out, can you determine if homeowners are actually getting a fair deal?
At a very basic level, a bank will choose an interest rate higher than the interest rate it is paying on the funds it's borrowing to lend to you.
The bank makes money by borrowing at a lower rate and lending you money at a higher rate.
To fund variable rate loan products, commercial banks use short-term money markets – as opposed to longer-term markets that fund fixed-rate loans.
Banks have many sources of funding spanning various markets, products and maturities.
The most important rate, though, in terms of bank funding costs, according to the Reserve Bank, is what's known as the 3-month bank bill swap rate (BBSW) – this is the rate at which they can issue 'bank bills' …
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