How to benefit from the coming mortgage price war

There haven’t been many good news stories for home loan borrowers lately, as most of the focus has been on rising interest rates and falling house prices.

However, the housing slump may also bring something of a silver lining to the 3.3 million-odd households with mortgages. As mortgage lending slows, it’s forcing banks to compete more aggressively, giving customers the opportunity to save on their home loan. On current trends, it looks like there’s a mortgage price war coming.

But unlike other price wars that occasionally break out in the supermarket aisles, for example, borrowers who go about their business as usual won’t automatically benefit from this bout of interbank hostilities.

No, price wars between banks are different. To get the lowest interest rates, customers need to be more active, whether that’s by haggling, threatening to leave their bank, or even moving their business elsewhere.

That is especially true with this latest step-up in competition between banks, which appears to be less overt and less aggressive than the post-COVID mortgage war of 2022 and 2023. There are savings to be had, but borrowers will probably have to seek them out.

Australia’s $2.5 trillion mortgage market is always a key battleground for banks because it’s the biggest source of bank loans in the country. Lately, however, the intensity of competition has lifted.

Banks all want to expand their loan portfolios, but there is simply less growth to go around because falling house prices and lower property turnover results in less borrowing.

So, banks are being forced to fight harder for customers, and the most obvious way they can do this is by cutting their interest rates for new borrowers.

Does it surprise you that these rate cuts haven’t received a lot of attention?

That’s because of the unusual (though rational) way in which banks compete in home loans.

When a supermarket cuts the price of milk to get customers in the door, or an airline launches a round of discounted fares, they’ll tell the world about it.

The most important point is that existing customers who do nothing won’t pocket savings.

Banks, however, don’t really want to alert all their existing mortgage customers to the possibility of getting a lower interest rate, because it would harm their bottom line to give existing borrowers a rate cut. Instead, banks prefer to target their best deals at the people who are most likely to help the bank grow their loan portfolio: new borrowers, or people who are refinancing from a rival.

One way to reach these people is through mortgage brokers, who are constantly dealing with people who are house hunting or refinancing.

In the last month, banking giants have quietly cut some interest rates they’re offering new borrowers as they face a sharp slump in home loan activity.

The Commonwealth Bank – which controls more than a quarter of the market – cut its variable rates available to new borrowers by between 5 and 8 basis points in June. The change was flagged to mortgage brokers.

Westpac, the second biggest, has cut its variable rates for new owner-occupiers by up to 14 basis points and rates for new investors by up to 11 basis points.

Barrenjoey’s Jon Mott estimates ANZ Bank has cut its rates by about 5 basis points for customers in certain loan-to-valuation bands. Macquarie also cut variable rates for new customers by 5 basis points on Friday.

The exact size of the cuts depends on the circumstances of each borrower, including their loan-to-valuation ratio, but the point is even seemingly small rate cuts can deliver worthwhile savings. A rate cut of 0.1 percentage points will lower monthly repayments on a $600,000 loan by about $40.

Well-informed industry sources also say some banks are once again paying cashbacks to retain their customers – a practice many banks ceased a few years ago because bankers thought it was fuelling “irrational” competition. We’re not back to the heady days of 2022 when some banks were openly paying people $4000 to refinance, or even $6000 in some cases.

One mortgage broking source says the cashbacks are worth about $1000 to $1500 now, and they’re only being paid by some banks, and banks aren’t being overt about it. But they’re still a sign things are heating up.

MST Financial analyst Brian Johnson says another front in the battle is that all the major banks are trying to write more loans through their branches, to wrestle share back from mortgage brokers. “To me, it looks like the beginnings of a price war,” Johnson says.

Jefferies analyst Matt Wilson says the fight between banks is putting borrowers in the box seat, and if the slowdown in mortgage lending continues it will intensify competition between banks. “It’s like the seagulls fighting over a chip,” he says of the fight between banks. “Borrowers are in demand because there are fewer of them, and banks need to grow their loan books to grow their earnings.”

So how can customers benefit from the banks’ slugfest?

The most important point is that existing customers who do nothing won’t pocket savings. The lower interest rates are being offered to people who switch, or those taking out new loan, or threatening to leave their bank.

So, customers who want to push for a lower interest rate should pick up the phone, whether that’s to their existing bank, a rival or a mortgage broker, or they should check out the best deals online.

Experts also say borrowers shouldn’t limit themselves to the largest banks, as often the smaller “challenger” brands have more incentive to offer a cut-price deal. Importantly, all banks in Australia receive a government guarantee on deposits of up to $250,000.

Data insights director at Canstar Sally Tindall says 26 lenders have cut one of their variable rates since the start of June, and nearly all of them are smaller players. Once again though, the rate cuts are only for new borrowers.

All up, it’s clear the fight between banks is heating up. The contest is not as fierce as the mortgage war of a few years ago, and it doesn’t change the fact that borrowers have still endured three rate rises from the Reserve Bank this year.

But on current trends, there could be an opportunity to slightly reduce the sting of those RBA rate hikes, for those who are prepared to haggle with their bank.

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