Banks are granting deeper discounts to customers who take out big mortgages, with some lenders offering the biggest reductions in advertised rates since before the global financial crisis.

As lenders compete for a bigger slice of the $1.3 trillion home loan market, mortgage brokers say discounts have grown to as much as 1.4 percentage points off standard variable interest rates for the most sought-after borrowers.

The increase in discounting comes as regulators warn home buyers and banks to remain cautious when interest rates are at record lows and household indebtedness is rising. While standard variable mortgage rates have not moved since the Reserve Bank cut official rates to 2.5 per cent in August last year, some borrowers have been able to get a better deal by securing a discount from their lender.

The discounts are typically offered by banks as part of a package deal, and the biggest reductions are reserved for people who borrow the most money.

Mortgage Choice, the country’s largest independently owned mortgage broker, says discounts have recently hit up to 1.4 percentage points for people borrowing large amounts, and the trend drove more borrowers towards variable-rate loans in May.

”We haven’t seen discounting like this since well before the GFC,” spokeswoman Jessica Darnbrough said.

”Lenders are hungry for business and with rates sitting at historical lows, they are all being forced to out-discount each other in a bid to grow their market share.”

With banks also cutting their fixed-rate home loans, Reserve Bank governor Glenn Stevens noted the trend on Tuesday, when the central bank left official rates on hold.

”Interest rates are very low and for some borrowers have edged lower over recent months,” he said.

The trend comes as regulators seek to make sure home buyers and banks remain cautious in an environment of cheap debt.

The Australian Prudential Regulation Authority last week issuing new guidelines on responsible lending practices and said there was a risk banks become complacent when interest rates were low and house prices rising.

Reserve Bank official Luci Ellis also last month warned first home buyers not to overstretch themselves in the competition with investors to buy property.

Ms Darnbrough said that to obtain 1.4 percentage points off the standard variable rate a customer would have to borrow more than $1 million and have a deposit of more than 20 per cent of the property’s value.

Customers borrowing $500,000 with a 20 per cent deposit would be eligible for discounts of up to 1.1 percentage points from the Commonwealth Bank-owned Bankwest, 1.15 percentage points from Suncorp, or slightly less from various other lenders, she said. The discounts are determined on a case by case basis.

Banks have raised mortgage discounts in part because their funding costs have fallen, but also because it is a way for them to sell a wider range of financial products.

John Kolenda, managing director of mortgage broker 1300HomeLoan, said he had seen discounts as large as 1.36 percentage points, and banks used discounts to recruit customers of other products such as deposits or credit cards.

”They are trying to acquire these customers, to then provide them with broader solutions,” Mr Kolenda said.

Stockbroking analysts have highlighted the trend towards increased discounting as a potential squeeze on bank profit margins.

Reflecting the heightened competition for customers, latest results showed the big banks’ average net interest margins narrowed by 5 basis points to 2.08 per cent.

While all of the major banks are targeting mortgage growth, official figures show National Australia Bank and ANZ Bank have been expanding at the quickest pace.

NAB’s mortgage book grew at an annualised pace of 8 per cent in April, and ANZ’s grew by 7.6 per cent, Macquarie analysis of Australian Prudential Regulation Authority show. Getting the best mortgage deal

Finding the right mortgage is more than just finding the lowest interest rate. However, even seemingly small differences interest rates can save tens of thousands of dollars in repayments.

????????????????????????Shop around and consider the smaller lenders who often have the lowest rates. Do not just accept lenders’ advertised rates as most lenders will offer discounts to borrowers with good credit histories. The larger the mortgage, the deeper the discount that can be expected.

????????????????????????It is not just the interest rate. Charges and fees can add thousands to the cost of a loan. All lenders are required to provide the “comparison rate” alongside their advertised rates. The comparison rate is based on a loan of $150,000 and a term of 25 years. It is a good attempt to capture the fees and charges of the loan and express those costs through the interest rate.

????????????????????????Mortgage brokers can be useful. Be aware they can have only a limited range of lenders. Some, while professing to recommend from a large panel of lenders, only recommend the mortgages from a couple. Lenders usually pay brokers commissions that are based on the size of the mortgage. Be wary of being advised by a mortgage broker to borrow more than is needed.

-John Collett

Posted by John Collett – The Age on 4th June, 2014