HOME owners are being offered bigger discounts on increasingly large mortgages as banks seek to breathe life into the flagging lending market.

Borrowers who take out a loan of more than $250,000 can secure at least 0.7 per cent off the interest rate on a standard variable mortgage and 0.8 per cent if they opt for a $500,000 loan.

That is cutting the current headline rate on a home loan from 7.8 per cent to 7 per cent as the banks engage in a tit-for-tat battle to bolster their mortgage books at a time of subdued credit growth.

Broker Goldman Sachs last week cut its forecasts for housing loan growth to 2.9 per cent for the second half of 2011, which would result in a rise of just 6 per cent for the whole year.

As well as increased discounts, major lenders have also loosened the limits on the percentages of the total amounts they are prepared to advance with a deposit.

The limits were cut to as low as 80-85 per cent in the wake of the global financial crisis as borrowers were required to put down more of their savings.

But the country’s biggest lender, Commonwealth Bank, has in the quarter between February and the start of this month increased its loan-to-valuation ratio from 90 per cent to 95 per cent, according to the latest research compiled by Deutsche Bank.

Commonwealth Bank is also offering a discount of 0.75 of a per cent on its standard interest rate of 7.81 per cent for those who borrow between $250,000 and $500,000, a cut of 0.85 per cent on loans up to $750,000 and a reduction of 0.9 per cent on mortgages above that amount.

Westpac, which lies second in the house lending league, is now allowing home owners to borrow 85 per cent of a property’s price without taking out mortgage lender’s insurance – cover that protects banks if people default on their loans.

It has also reduced the amount required for a deposit from 10 per cent of the total to 5 per cent.

Westpac is offering similar interest rate discounts as CBA on loans over $250,000 and $500,000.

Westpac’s St George subsidiary has followed suit and is offering a slightly higher discount of 0.8 per cent as it targets loans in the $250,000 to $500,000 range.

National Australia Bank, which is competing more on the basic price of loans to win business and recently launched an online-only mortgage offer of 6.59 per cent, is offering slightly lower discounts than its rivals.

Deutsche Bank’s “mystery shopper” research shows there is little to choose between the big four banks and the five regional banks, two of which – St George and BankWest – are owned by the majors.

Nevertheless, it said that NAB’s price-cutting moves over the past six months had spurred CBA, Westpac and ANZ into action through the offer of bigger discounts to stop customers switching.

NAB, though, has been winning as much as three times the rate of growth of new mortgages as the other major banks through its highly publicised lower interest rate campaign.

Posted by Danny John – The Age on 30th May, 2011