New loan interest rates are falling amid the wave of cheap money
Home loan customers are in the box to ask for a better deal as a global decline in the cost of money pushes banks to cut interest rates dangling in front of new customers.
However, as usual, the reduced prices are not automatically passed on to the banks’ long-term customers. The most competitive offers are given to people who are new to borrowing and those who are willing to switch lenders or cause trouble.
In response to the coronavirus crisis, the Reserve Bank of Australia cut official key interest rates to just 0.25 percent in March. Most banks didn’t pass the cut on to their floating rate home finance customers, however – but that doesn’t end the story.
In the months since then, lenders have competed aggressively on price while their financing costs have fallen to all-time lows.
Figures from Macquarie and the mortgage broker Lendi show that since April loans have been settled with an average “spread” at the official cash rate, which is 0.2 percentage points lower than in the first half of the year. In other words, people who took out new home loans since April are paying less than those who took out their loan earlier.
Macquarie analysts, led by Victor German, say this decline in lending rates occurred as banks benefited from lower borrowing costs than fixed-term deposits have decreased and the wholesale financing costs of banks have decreased.
Banks could try to use some of that cash gain to grow their profits, but analysts believe that the greatest benefit will go to new borrowers.
“As financing costs continue to improve, it appears that mortgage companies are depleting margin benefits as competition for new credit remains intense,” they say.
The latest RBA figures also show that the interest rate on new loans from the big four banks to owner-occupiers who pay principal and interest fell from 2.94 percent to 2.76 percent in April. The average interest rate for all loans in this category (i.e. what existing customers pay) is significantly higher at 3.25 percent.