Two different types of variable interest rate are common. The first is a variable rate where the rate is calculated by a precise method and not determined by the lender. The second is where the lender has the discretion to set the variable interest rate, often expressed in unlimited terms.
Example 1 – Precise Calculation
Rate means One-Month BBSY plus X.XX%, where BBSY means the average bid rate displayed at or about 10:30am (Sydney time) on the first day of the relevant month on the Reuters screen BBSY for a term of one month.
Example 2 – Discretion
The Lender may change the interest rate at any time, except in respect of a fixed rate loan during the fixed rate term.
The former type of clause is particularly common in commercial lending, and bank exposure to bank bill swap rates is significant as a result. In 2016 Australian banks were accused of seeking to manipulate the bank bill swap reference rates in Australia for financial gain. If those allegations were proven, it could have undermined confidence in that kind of mechanism. After other institutions settled the claims, in 2018 Westpac successfully defended the claims of manipulation, though was held to have engaged in other contraventions.[1] Notably Australia’s bank bill swap rate setting process was less susceptible to manipulation than other international reference rates. The London Interbank Offered Rate (LIBOR), a reference rate set each day based on estimates submitted by 18 global banks, was used in many international transactions. In 2012 it was found that large international banks were manipulating the subjective nature of the estimates submitted, and as a result it is being replaced with new benchmarks which uses actual rates used in a similar way to Australia’s BBSY. For commercial borrowers, the reference rate is well understood, and the margin on top paid by borrowers is based on their respective creditworthiness.
For home borrowers in Australia, most variable rates are set by the lender without any external reference point. Argument has arisen as to whether that position, giving an unfettered discretion to vary the interest rate, is void for uncertainty. There are three key principles that have been approved in appellate cases. First, in Kabwand v NAB it was suggested that there can be no concluded bargain if a vital matter has been left to the determination of one of the parties. However, as the clause in that case constrained changes to those ‘conforming with general movements in the bank’s interest rates’ the clause was held to be enforceable.[2] In Australian Executor Trustees v Prodap Services, summary judgement was refused for the lender as the clause had no such constraint and was held to be potentially either void or subject to an implied term that any change must be fair and reasonable.[3] Most recently, in Nikoloff v Perpetual Trustee it was held that the cases support an argument that an unfettered power without constraint may be void for uncertainty, but nothing in the decisions prevents a lender from varying interest rates by reference to its own advertised rates for set categories.[4]
[1] Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) [2018] FCA 751 at [2535].
[2] Kabwand Pty Ltd v National Australia Bank Ltd [1989] FCA 131; (1989) ATPR 40-950 at 50379, 50381.
[3] Australian Executor Trustees Limited v Prodap Services Pty Ltd & Ors [2014] QCA 142.
[4] Nikoloff v Perpetual Trustee Company Limited [No 2] [2022] WASCA 16.