All of the major banks have sliced interest rates on fixed rate home loans and some business loans but left standard variable rates unchanged, as rock-bottom deposit rates limit their ability to pass this week’s Reserve Bank rate cuts to all borrowers and margins come under renewed pressure from the extreme policy.
The combination of actions by the RBA this week will push more mortgage customers towards fixed interest rates. To get the benefit of lower rates, home loan customers on standard variable rate loans will need to refinance to fixed terms, while existing fixed rate loans do not change.
Commonwealth Bank and Westpac are both offering a four year, fixed rate mortgage at 1.99 per cent, while National Australia Bank said it will undercut this with a 1.98 per cent rate. It’s the first time any of the banks have offered a mortgage at below 2 per cent.
ANZ followed late on Wednesday, with a four-year fixed rate at 2.29 per cent. All of the big four also reduced one-, two- and three-year fixed rates for owner occupiers. Fixed rates are now lower than the best variable rate mortgages on offer.
Credit analysts at CBA estimated the total monetary easing package unveiled by the RBA on Tuesday could reduce major banks’ funding costs by around half the 25 basis point cut to the cash rate target, which was limiting the extent of the pass‑through to lending rates.
That’s because banks cannot reduce the rates paid on many deposits already near zero levels and are facing a squeeze on their ‘net interest margins’ – the difference between what they pay depositors and charge borrowers.
The amount of deposits near zero has been rising as rates have fallen: Morgan Stanley estimates one-third of Australian deposits, worth $660 billion, are on rates less than 0.25 per cent, a level that is 60 per cent higher than a year ago.
