A swag of banks slashed interest rates for the most popular type of fixed-rate home loan in July, as markets bet the Reserve Bank will act to stimulate the economy as soon as this week.
With futures markets implying there is roughly a 60 per cent chance the RBA will lower interest rates on Tuesday, new figures from interest rate comparison website RateCity show 18 lenders cut three-year fixed rates in July, across 112 loan products.
The changes are notable because in a typical month where the RBA leaves rates unchanged, as it did in July, rates normally only change for 20 to 30 three-year products, as part of banks’ regular tactical pricing changes.
The flurry of cuts has occurred because fixed mortgage rates are influenced by financial market expectations for official interest rates, and there is a widespread view the RBA will soon take the cash rate to a new record low.
RateCity said the average reduction in three-year fixed rates during July was 0.19 percentage points, with lenders including National Australia Bank, ANZ Bank, ING Direct, HSBC and Suncorp among those to have cut.
RateCity’s data and insights director Peter Arnold said the cuts were occurring in anticipation of the RBA dropping the cash rate from 1.75 per cent to a new record low of 1.5 per cent.
The average three-year fixed rate, at 4.13 per cent, was now 0.36 percentage points cheaper than an average variable loan, the widest gap in more than a year, he said.
While this might tempt more borrowers to considering locking in a fixed rate, Mr Arnold said falling fixed rates were also a signal that banks expected to cut their variable rates in the future.
“It’s one of the best indicators we’ve got of where lenders think rates are going,” Mr Arnold said.
Among the big four, ANZ slashed 0.44 percentage points off its three-year rate for owner-occupiers to 3.85 per cent during the month, while NAB cut its three-year rate by 0.10 percentage points to 3.89 per cent. The lowest rate on offer was 3.67 per cent from non-bank Mortgage House, RateCity said.
The figures include cuts for both owner-occupiers and investors, who are charged higher rates.
Of the more than 20 market economists surveyed by Bloomberg, four out of five believe the RBA will cut next week. Latest figures showed inflation is running at just 1 per cent, well outside the central bank’s 2 to 3 per cent target range.
However, it remains uncertain how much of any cut in official rates the banks will pass on to their customers.
Managing director of Homeloanexperts.com.au Otto Dargan said he thought it was “very unlikely” banks would pass on the full value of any cut in official interest rates next week to customers.
Three of the big four passed on the previous May RBA cut in full, but many believe this was a response to the fierce political scrutiny of banks.
“The election is over, their margins are being squeezed by discounting, compliance and capital requirements. They’ll be looking for ways to get back some of that margin,” Mr Dargan said.
“A lot of our borrowers are choosing to wait until after the RBA announcement to see which lender has the lowest three-year fixed rate and to see what variable rates are available at that time.”