Cut-price mortgage battle could stymie moves to slow booming housing market

PHOTO: Banks are increasingly competing for customers by cutting variable rates for new borrowers.

A price war between banks trying to lure new customers with cheap interest rates could dull the impact of the banking regulator’s recent move to slow the housing market, underlining the risk of further loan curbs, analysts say.

With fixed interest rates gradually on the rise, lenders are increasingly competing for clients by offering lower variable interest rates to new customers.

In the latest sign of competition in the market, the Commonwealth Bank and ING on Friday both cut some of their variable interest rates for new customers with larger deposits.

CBA, which has repeatedly raised concerns about the risks in the booming housing market, reserved its biggest cuts for lower-risk new customers with a 30 per cent deposit, and also raised various fixed interest rates, citing higher funding costs.

Comparison website RateCity said Friday’s cuts were part of a trend in which 28 lenders had cut at least one variable rate in the last month.

With mortgage competition tipped to intensify, some analysts say this general trend towards lower variable interest rates for new clients could reduce the impact of the Australian Prudential Regulation Authority’s (APRA) move this month to require banks to more cautiously assess home loan customers.

That is because APRA’s policy change requires banks to assess new borrowers at an interest rate 3 percentage points higher than their actual rate on their loan, up from 2.5 percentage points previously. Falls in interest rates can therefore mean customers are tested at a lower rate than they would have been otherwise.

Macquarie analyst Victor German pointed out this possibility in a note to clients, which argued APRA may need to consider further loan curbs in the future. He said the effect of the APRA curbs on owner-occupiers would be particularly small.

“If the competitive environment continues to intensify, the impact of recently announced macroprudential changes for owner-occupiers is going to be negligible,” Mr German said on Friday.