ASIC’s Medcraft nudges banks towards tracker mortgages

ASIC chairman Greg Medcraft has provided his most detailed endorsement yet of tracker mortgages.

ASIC chairman Greg Medcraft at the Senate estimates hearing. Picture: AAP

Australian Securities & Investments Commission chairman Greg Medcraft has provided his most detailed endorsement yet of tracker mortgages — loans that are pegged to movements in the Reserve Bank cash rate — which have suffered criticism from most of the local banking industry despite their popularity offshore.

Appearing before a Senate estimates committee on Wednesday, Mr Medcraft tabled a briefing report on tracker mortgages that hits back at suggestions the major lenders’ funding costs were not tied to the RBA’s overnight cash rate.

“While the introduction of tracker mortgages is a decision for the lenders themselves, ASIC would encourage lenders to offer this product,” the report says.

The ASIC report argues that almost 60 per cent of funding for banks is gained through domestic deposits, which are closely linked to the cash rate. Just over 20 per cent is achieved through short-term debt and over 10 per cent through long-term debt. For banks with a more traditional retail structure, about 90 per cent of non-equity funding came from deposits.

“It may be technically correct, as the banks have argued, that they don’t fund off the cash rate, however, overall, the weighted average funding cost for a major bank is correlated to the prevailing RBA cash rate,” the report notes.

“This is because most debt securities and deposit products either automatically adjust or are hedged using interest rate derivatives against adverse interest rate movements.”

ASIC details how tracker mortgages are prevalent in Britain, where they are thought to count for 11 per cent of mortgages, in the US and Ireland, where historical high rates of tracker mortgage use is now falling.

Tracker mortgages were a focus of the house economics committee’s banking inquiry this month and have won support from ANZ chief Shayne Elliott and Mr Medcraft, who argues the main benefits of the product come in the form of added transparency, timing and comparability.

Last week, Auswide Bank launched a rate tracker mortgage that has a margin of 2.49 per cent, making it a loan with an interest rate of 3.99 per cent. For comparison, the major banks’ advertised standard variable rates range between 5.22 and 5.29 per cent.

RBA governor Philip Lowe said on Tuesday the market would supply tracker mortgages given sufficient demand, and that the issue for lenders was to offer the product at a profit.

“I think it’s worth exploring whether they have a role to play, but I’m not attracted to the idea of mandating that institutions offer tracker mortgages,” Dr Lowe said.

Last week National Australia Bank chief executive Andrew Thorburn said regulating pricing “would be a dangerous step” and the sentiment was echoed by Australian Prudential Regulation Authority chairman Wayne Byres.