Banks are granting deeper discounts to customers who take out large mortgages, with some lenders offering the biggest reductions in advertised rates since before the global financial crisis.
As lenders compete for a bigger slice of the $1.3 trillion home loan market, mortgage brokers say discounts have grown to as much as 1.4 percentage points off standard variable interest rates for the most sought-after borrowers.
The increase in discounting comes as regulators warn home buyers and banks to remain cautious in an environment of record low interest rates and rising household indebtedness.
While standard variable mortgage rates have not moved since the Reserve Bank cut official rates to 2.5 per cent in August last year, some borrowers have been able to get a better deal by securing a discount from their lender.
The discounts are typically offered by banks as part of a package deal, and the biggest reductions are reserved for people who borrow the most money.
Lenders are hungry for business and with rates sitting at historical lows, they are all being forced to out-discount each other in a bid to grow their market share.
With banks also cutting their fixed-rate home loans, Reserve Bank governor Glenn Stevens noted the trend on Tuesday, when the central bank left official rates on hold. ‘‘Interest rates are very low and for some borrowers have edged lower over recent months,’’ he said.
The trend comes as regulators seek to make sure home buyers and banks remain aware of the risks in an environment of very cheap debt.
The Australian Prudential Regulation Authority last week issued new guidelines on responsible lending practices and said there was a danger banks may become complacent when interest rates were low and house prices rising. Reserve Bank official Luci Ellis also last month warned first-home buyers not to overstretch themselves in the competition with investors to buy property.
Capital city house prices dropped 1.9 per cent in May, but it comes after strong growth and regulators remain alert to the risks.
Customers borrowing $500,000 with a 20 per cent deposit would be eligible for discounts of up to 1.1 percentage points from the Commonwealth Bank-owned Bankwest, or 1.15 percentage points from Suncorp, she said.
Aside from using mortgage discounts to expand their share of the home loan market, banks also use cut-price loans to sell a wider range of financial products.
John Kolenda, managing director of mortgage broker 1300HomeLoan, said he had seen discounts as large as 1.36 percentage points in the competition between lenders, and banks used discounts to recruit customers of other products such as deposits or credit cards. ‘‘They are trying to acquire these customers, to then provide them with broader solutions,’’ Mr Kolenda said.
Analysts have highlighted the trend towards increased discounting as a potential squeeze on bank profit margins – notwithstanding a fall in their funding costs.
All of the major banks are targeting mortgage growth, but official figures show National Australia Bank and ANZ Bank have been expanding at the quickest pace recently.