We got a sign of those pressures on the big banks again yesterday when Westpac joined the Commonwealth in cutting interest rates on some of its fixed-rate home mortgages – with some of the cuts aimed directly at the weak investor sector.
The cuts are small just 0.2% but they follow the slide long-term bond yields to historically low levels in the past month or so and further moderation in short term bank funding costs (according to the Reserve Bank).
There were no cuts to variable rate mortgages which make up the overwhelming bulk of home mortgage lending. In fact fixed rate principal and interest home lending makes up around 16% of currently mortgage approvals, so the impact of the rate cuts will be small.
The small cuts to a minor part of the home lending products at both banks tell us this is a test – a try-on to be made by the banks to see if it stimulates a rise in demand.
But with the Reserve Bank expected to cut rates once, and even twice in the next year, the small cuts to fixed rates won’t have much of a cost or market reaction. Cutting variable rates would generate a bigger impact on the market
That would be too radical for the banks (and painful financially at the moment), even in the wake of the outcome of the financial services royal commission.
Westpac said yesterday it was lowering fixed-rates across three, four, and five-year products for owner-occupiers who pay principal and interest.
It is also cutting fixed rates for investors, a part of the market that has been particularly weak, across two, three and five-year terms. The biggest cut for owner-occupiers was a 0.2 percentage point reduction in the four-year fixed rate, to 4.09% matching the Commonwealth.
For investors, the biggest cut is a 0.2 percentage point reduction on its three-year loan, to 3.99%, also matching CBA.
The combination of falling bond yields and short term bank funding costs have allowed the banks some room to try and stimulate demand without impacting too much on their net interest margins.
The cuts as banks are facing slower loan growth – particular for investors with Reserve Bank data showing investor lending to be at all-time lows – with growth of less than 2% a year.
Slowing lending has been the increased scrutiny on the banks on mortgage lending to both owner occupiers and investors as a result of disclosures at the royal commission.
Falling prices for houses and apartment – especially in Sydney and Melbourne – has also seen demand for home loans dry up as buyers and those refinancing sit on the sidelines waiting for the price falls to show signs of slowing.
The cuts will only apply to customers taking out a new fixed rate loan and who take out a “package” deal, which involves customers holding other financial products with the bank, such as a transaction account.