A mortgage rate is the retail price of a long-term loan, but the bank funding it uses a mix of sources with different costs and maturities. Customer deposits form a large share of funding, alongside wholesale debt, equity and central-bank liquidity arrangements. Changes in those inputs help explain why home-loan rates do not always move in perfect lockstep with the cash rate.
The cash rate remains a powerful anchor. It influences short-term market rates and the price banks pay on many deposits and debt instruments. Yet competition, hedging, credit risk, operating expenses and margins also enter the final decision, creating differences between lenders and between fixed and variable products.
The funding mix behind a mortgage
At-call deposits include transaction, savings and offset balances. Term deposits commit funds for an agreed period, while wholesale funding can be raised through bonds and money markets. Equity is more expensive but absorbs losses. A bank manages these sources together rather than matching a particular customer deposit directly to a particular mortgage.
The cost of at-call deposits can move slowly because accounts have different rates and conditions. Wholesale debt prices respond to market expectations, credit spreads and term. Hedging is used to manage interest-rate risk where assets and liabilities reprice differently. The resulting average funding cost changes over time, even if the composition of the balance sheet appears stable.
Capital and liquidity requirements also shape pricing. Holding liquid assets and loss-absorbing capital supports resilience but has a cost. Credit losses, loan administration and the return expected by shareholders add further components. That is why a mortgage rate is more than the cash rate plus a fixed margin.
Variable and fixed rates look at different horizons
Variable mortgage rates are strongly influenced by current funding costs and competitive decisions. A cash-rate change can flow through quickly, but the lender decides the timing and size subject to the contract and law. Deposit pricing may move at the same time as banks seek to maintain an appropriate funding mix.
Fixed rates reflect the market cost of locking in funding and interest-rate exposure for a future period. Expectations about the cash rate over that term are embedded in wholesale reference rates and hedging costs. Fixed mortgage rates can therefore fall while the cash rate is unchanged, or rise before an expected policy increase occurs.
This does not mean markets predict the future accurately. Expectations adjust when inflation, employment, global markets or Reserve Bank communication changes. A fixed rate is a price for certainty over a term, not a reliable public forecast of where variable rates will be at every point.
Why lenders can offer different prices
Each institution has a different deposit base, wholesale access, capital position, customer strategy and appetite for new loans. A lender seeking growth may discount selected products, while another may prioritise deposits or preserve margin. New-customer offers can also differ from the rates paid by existing borrowers.
For comparison, the relevant figures include the interest rate, comparison rate where applicable, fees, loan features and the rate after any fixed or introductory period. Break costs can apply when leaving a fixed loan early, while variable loans may offer offset or redraw features that change their practical value.
Funding costs explain part of mortgage pricing, but they do not make every change inevitable or uniform. Competition and customer behaviour still matter. Borrowers can ask about repricing or compare alternatives, while recognising that refinancing includes application, valuation, discharge and possible switching costs.
The timing of repricing can make public comparisons look contradictory. A bank may have raised term-deposit rates weeks earlier to secure funding, issued wholesale debt when spreads were wider, and hedged part of its exposure for several years. Today’s cash rate is therefore only one input into today’s average cost. New funding gradually replaces maturing funding, and loan books reprice on their own schedules. Analysts often examine the direction of several series rather than expect one-for-one movement on a single day.
Borrower risk and loan structure then influence the final customer rate. Loan-to-value ratio, occupancy type, repayment method and product features can produce different prices within the same lender. That variation is separate from the institution-wide funding cost, although both appear in the advertised mortgage market.
This article provides general information only and is not personal financial or credit advice. Mortgage pricing and market conditions change, and individual eligibility depends on lender assessment and product terms.