Why is it that you apply for a mortgage & after going thru an application to say that you are a good applicant & are given the mortgage an amount over 25years …

That's a really sharp observation and a question many mortgage holders ask — especially when rates rise sharply. Here's the core of it:

The short answer is — the bank didn't actually lock in that money for 25 years.

When you take out a variable rate mortgage, the bank isn't going into a vault, pulling out a fixed pile of cash borrowed at 5% and handing it to you for 25 years. What's actually happening is much more dynamic.

How banks really fund mortgages

Banks are constantly rolling over their funding. The deposits they use to fund your mortgage aren't locked in — customers can withdraw savings, move money, or close accounts at any time. The bonds they issue to fund loans are typically short term — 3, 5, maybe 7 years — not 25. So every few years the bank has to go back to the market and borrow again at whatever the current rate is.

So when the RBA raises the cash rate, the bank's own borrowing costs go up almost immediately, even on money they lent out years ago. They pass that cost onto variable rate mortgage holders.

Therefore, why does the bank get to move the goalposts?

Because of the contract you sign. A variable rate mortgage explicitly states that the interest rate can change. The bank is essentially saying upfront — we will lend you this money but we reserve the right to reprice it as our costs change.

The alternative — fixed rate mortgages

This is precisely why fixed rate mortgages exist. When you fix your rate, the bank goes and hedges that risk — they use financial instruments called interest rate swaps to lock in their funding cost for that period. They wear the risk that rates might move. That's why fixed rates are often slightly higher than variable rates — you're paying a premium for certainty, and the bank is charging you for taking on that risk.

The catch with fixed rates

If rates go down during your fixed period, you miss out. And if you want to break the fixed term early — say you sell the house — the bank can charge significant break fees because they have to unwind those hedging contracts.

Is it fair?

That's genuinely debatable. In countries like the US, 30-year fixed rate mortgages are the norm — you lock in your rate for the life of the loan and rate rises don't affect you. This is possible partly because the US has a large mortgage-backed securities market where investors take on that long-term risk.

In Australia and the UK, variable rate mortgages dominate, which means homeowners absorb much more of the interest rate risk than in the US. When the RBA raised rates 13 times between 2022 and 2023, Australian variable rate mortgage holders felt each one of them — which is precisely the point, since the RBA uses rate rises to cool consumer spending.

So in short — the system is set up to transfer interest rate risk onto borrowers rather than banks, and it's baked into the contract from day one. Whether that's fair is a very reasonable thing to question.