If you have a home loan and are waiting for interest rates to fall further, don’t count on the Reserve Bank to help out.

Governor Glenn Stevens last week gave his clearest signal yet that official interest rates will probably remain at their record low of 2.5 per cent for quite a while. Financial markets reckon that when they finally change, they will rise, rather than fall.

But that doesn’t mean there’s no way to save on borrowing costs.

After all, what you pay the bank for money is affected by other factors well out of Stevens’ control.

And, fortunately, banks are competing fiercely to sign up more customers in anticipation of stronger credit growth. This means many are offering cut-price credit.

However, you’ll probably have to shop around to make the most of this heightened competition.

Many are sceptical about how much the big banks in Australia really compete. They have an 80 per cent share of the market for new home loans, compared with about 60 per cent before the global financial crisis, after swallowing rivals such as St George, BankWest, RAMS and Aussie Home Loans.

Right now, however, there’s evidence the banks are indeed competing to lend households money. Citi, HSBC and Bank of Queensland have all recently cut certain variable rates for new customers. Westpac and National Australia Bank have cut fixed rates, with NAB’s four-year fixed-rate mortgage now at the lowest level in more than 20 years.

And, more subtly, banks are offering bigger discounts off their advertised rates, also to new customers.

A recent survey from JP Morgan analyst Scott Manning said the average discount off standard variable rates has risen by about 10 basis points to 85 basis points in the last couple of months – near 2012 peaks. On a $300,000 mortgage, an extra 10-basis-point discount is equal to a saving of $18 a month.

So what’s the catch?

Well, the better deals are only for new loans. That means the vast majority of people with mortgages probably won’t benefit from this competition.

After all, banks aren’t doing this to be nice. They’re competing more fiercely because they want to steal business from rivals.

This means the discounts will only really go to customers who are taking out new loans, or to those prepared to shop around.

To take advantage of the competition, you may have to threaten to switch banks and see if your lender can match it. As the banks know, most of us don’t do this. Changing transaction accounts is enough of a hassle in itself. With a home loan, you may also need to have the house valued, or arrange a new lenders’ mortgage insurance policy.

Just how reluctant are we to switch banks? The Australian Institute has reported that only 3 per cent of us switch each year. With that degree of inertia, banks can compete more fiercely for new customers without inflicting much damage on the bottom line.

To really take advantage of the current wave of competition, borrowers may need to confront the messy process of switching, or at least make their bank think they are prepared to leave.

Posted by Clancy Yeates – Money Manager (Fairfax Digital) on 12th February, 2014