Mortgage war heats up as banks lower variable rates

Competition in the mortgage market is heating up as banks compete for fewer customers by cutting home loan rates, even as the Reserve Bank threatens to raise the cash rate.

The Commonwealth Bank cut mortgage rates across a range of its products in late June.

ANZ and Westpac immediately followed suit, and so did Macquarie Bank in July.

Investor Kevin Wong wrangled his lender for a better home loan rate.

"It was a discounted rate, and it was sort of like a promotional period where they offered this particular rate," he said.

"And so we just jumped on it, and we said, 'look, we just get it across the line this week, submit all the documents.'"

Mr Wong has switched from a principal and interest loan at 7.29 per cent to an interest-only loan at 6.79 per cent.

While the property investor lowered his rate by half a percentage point, switching to an interest only loan could cost him more in the long run. 

As part of the deal, he refinanced a $750,000 mortgage up to $920,000 to renovate his investment property, which he said was "fantastic".

"I was able to unlock that extra bit of equity, especially in this market at a better rate."

New customers better off

Mortgage broker Julian Choo said many banks continued to lower the price of their mortgage products.

"Dozens of banks have dropped their variable rates in the last month," Mr Choo said.

"Great news for new customers, but not so good for existing customers because they don't get to enjoy it."

He said banks usually did not proactively promote better interest-rate deals to existing customers.

"Banks quietly hope you don't ask for a better rate,"

Mr Choo said.

"They save their best for new customers, not those that have been with them for a while."

The big banks are chasing new customers as their funding costs rise and property prices fall.

The Commonwealth Bank has the largest slice of the mortgage pie, followed by Westpac, the NAB and the ANZ Bank.

But Macquarie Bank is nipping at their heels.

"So what we can see is that what is happening is they're very much going for let's try and get a bigger slice of the smaller pie, but in doing so you make the pie smaller," MST Financial banking analyst Brian Johnson said.

Data from Finder show the most competitive variable rates start around 5.69 per cent.

The best fixed rates are between 5.8 per cent and 6 per cent, depending on years and terms.

Mr Johnson told the ABC that Macquarie Bank had the financial firepower to lower interest rates on its residential loans to take customers from the big four banks.

"And so at some point, Macquarie have grown pretty significant market share, but when they actually get to whatever that figure, whatever that terminal rate is," Mr Johnson said.

"But when it gets to whatever market share they would like it to get to, or they think is where the opportunity is exhausted, then you could just tweak up housing rates a little, tweak down deposit rates a little."

Looming rate hike

Economists expect the Reserve Bank could hike interest rates later this month or in November.

Mr Johnson from MST Financial said customers needed to be on their toes about how the banks would claw back lost cash from higher borrowing costs.

"So where do they [banks] make their money?" he said.

"They make it on the people that are apathetic and not aware where their rate is relative to the new rate.

"They make their money through borrowing money really cheaply through some of their transaction accounts but even that is under pressure, once again because of Macquarie.

"They also make money through fees and commissions."

Finder spokesperson Taylor Blackburn said lenders were watching each other closely as competition intensifies.

"Banks are really looking at you on an individual basis," he said.

"They know that if they're not collecting interest on the loan, that somebody else very well could be."

The Reserve Bank next decides on interest rates on September 29.