Australia: Are Variable Interest Rates Variable? Mortgage Loans And Variations To Lenders´ Terms, Fees And Charges

Last Updated: 13 October 2009

The vast majority of mortgage loans are wholly variable at the lender's discretion. But are they?

Let's assume the lender's variable rate starts out 100bps above cash rates. Over the term, the lender increases the interest rate to cash rates plus 500bps. You would probably readily agree that the lender has acted improperly, and you probably suspect that a court would consider that this change is unconscionable. Presumably, therefore, whether a lender can change a variable rate depends on whether the change is reasonable. How can this reasonableness be assessed?

In a UK case Nash & Ors v Paragon Finance Plc [2001] EWCA Civ 1466 (15 October 2001) (click here to read), the borrower argued that there should be implied into a loan contract for a variable rate loan a provision that:

  1. the rate would not be adjusted otherwise than in accordance with an adjustment made by comparable lenders
  2. the rate should only be adjusted in accordance with cash rates
  3. the rate should not be varied arbitrarily, capriciously or unreasonably.

The court dismissed the first two arguments but upheld the third. The court said that it was clear that there must be some restriction on the mortgagee's ability to vary interest rates. It followed that the rate could not be adjusted arbitrarily, capriciously, or unreasonably.

Perhaps another way to put it is that there is an implied term that a lender will not adjust the interest rate, to an extent that no reasonable lender would have raised it.

To give effect to the reasonable expectations of the parties, the court said that it was necessary there be an implied term that the rates of interest are not set dishonestly, for an improper purpose, capriciously or arbitrarily. There was an implied term that the lender must not set rates of interest unreasonably.

In the particular case, the rates started out about 2% above building society rates and ended up about 7% above. It was important that the court found that the lender did not act capriciously against this particular borrower, or this particular class of borrowers. It is reasonably clear that if a lender selected an individual borrower or small groups of borrowers and increased their rates, such action is likely to be unconscionable. In this case, the court held that there was no capriciousness of that kind, and the lender increased its rates purely because of commercial considerations and these changes affected all borrowers. The lender had encountered financial difficulties and it felt obliged to raise the interest rates paid by its borrowers, acting in no way dishonestly.

The court held that it should only intervene where a bargain is grossly unfair to the borrower. Increasing the interest rate in this case did not contravene the ordinary principles of fair dealing.

In Australia, in respect of loans regulated by the UCCC, the court can cancel or reduce a change to interest rates if the court considers the change is unconscionable. In respect of loans governed by the Code of Banking Practice, banks must act fairly and reasonably towards their customers in a consistent and ethical manner, and this provision implied into all contracts may provide a further basis to complain about unilateral interest rate increases.

  • Tip 1 – Do not vary interest rates that effect only one borrower or a small group of borrowers
  • Tip 2 – Maintain records of why an interest rate change is required, particularly if your interest rate change exceeds market fluctuations.

Many credit contracts contain provisions entitling lenders to vary any term and to vary fees and charges and introduce new charges. While such provisions are extremely common, it would be unwise to take them at face value. Usually these rights are exercised honestly in good faith and the change will be enforceable against the borrower. However, if those rights are exercised arbitrarily, capriciously or unreasonably, it is likely that a court will not enforce the change.

For more information, please contact:


Jon Denovan

t (02) 9931 4927



Brian McPherson

t (07) 3114 0250


Deborah Bean

t (07) 3231 1567



David Albrecht

t (08) 9323 0910


Anthony Connor

t (08) 9323 0922


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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