Where Banks Actually Get the Money They Lend You
ADS Team
Author
August 15, 2026
27 days ago
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In short: Banks fund mortgages from three sources: customer deposits, wholesale borrowing in domestic and offshore markets, and securitisation. The mix matters to you because it determines how quickly your rate responds to the cash rate - a heavily deposit-funded bank behaves differently from one relying on wholesale markets.
Key takeaways
- Deposits are the largest and most stable funding source for Australian banks.
- Wholesale funding costs move with credit spreads, not only the cash rate.
- This is why lenders do not always pass on the full cash rate move.
- Net interest margin is the spread between what banks pay for funds and what they charge.
The three sources
| Source | Characteristics |
|---|---|
| Retail deposits | Largest, most stable; competed for through savings rates |
| Wholesale debt | Bonds issued domestically and offshore; priced on credit spreads |
| Securitisation (RMBS) | Loans packaged and sold to investors; central for non-banks |
Why the full cut is not always passed on
When the RBA moves the cash rate, only part of a bank's funding reprices immediately. Deposit rates are competitive and sticky; existing wholesale debt is already priced; new issuance depends on market conditions.
So a 0.25 point cash rate move does not translate into a 0.25 point change in a bank's cost of funds. That is the mechanical reason for partial pass-through - though competitive and commercial judgement plays its part too.
What this means for a borrower
- Do not assume your rate follows the cash rate. Check what your lender actually did.
- Deposit rates and loan rates move differently - banks reprice them on their own timetables.
- Ask for repricing after any move. Existing customers frequently sit above new-customer pricing regardless of what the cash rate did.
Frequently asked questions
What is net interest margin?
The difference between what a bank earns on loans and pays for funding, as a percentage of interest-earning assets. It is the headline profitability measure for a lender and is reported in every results announcement.
Do banks have to pass on cash rate cuts?
No. They set their own rates. Pass-through is a commercial decision influenced by funding costs, competition and public pressure.
Why do deposit rates rise more slowly than loan rates?
Repricing loans is immediate and applies to a large book; deposit competition is more segmented. The asymmetry is a persistent source of public criticism and regulatory attention.
Related reading
- Non-Bank Lenders: When They Beat the Banks
- How the RBA Actually Sets the Cash Rate: The Reaction Function
- Private Lenders vs Banks: When Private Finance Makes Sense
Sources
- Bank funding costs and lending rates — Reserve Bank of Australia
- Monthly banking statistics — APRA
Information current as at 2 September 2026.
General advice warning: This article contains general information only. It does not take into account your objectives, financial situation or needs, and it is not personal credit or financial advice. Consider whether it is appropriate for you and seek advice from a licensed credit representative before acting.
Any interest rate shown is an example only and is not an offer of credit. Where a rate is quoted, the applicable comparison rate is available from the relevant lender and should be considered alongside it.
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