First came the relaxation of bank lending standards, now get ready for the bank lending war.
The first shots have already been fired by the Commonwealth Bank (ASX: CBA) and ING which both shaved down interest rates on their housing loan products and there will be many more shots fired as all of the banks scramble to sign up new loan customers or steal them.
Commonwealth, ING and Westpac fire the first shots
Commonwealth shaved several of its loan products by up to 15 basis points, with its lowest advertised variable rate now 2.69%.
ING, which is now the country’s fifth largest bank for household balances and mortgages, has also been cutting most of its rates by 10 basis points, with a lowest advertised variable rate of 2.49%.
Earlier, Westpac (ASX: WBC) had begun advertising a two-year variable rate of 2.19% that reverts to 2.69%.
Cuts happening without RBA action
It is not hard to see where this is all heading with the other banks sure to take part in offering a flurry of low rate loans, even before the Reserve Bank cuts its official cash rate.
Several leading economists are now tipping a Reserve Bank cut in the cash rate to 0.1% in October or November.
With Treasurer Frydenberg now signalling that he wants the banks to free up their lending, the new battle between the banks will be for market share and that will include refinancing existing loans.
Those banks that are most successful at growing their loan books will be rewarded by the share market, with all of the banks already being valued higher as a result of the relaxation of lending rules.
Refinancing the name of the game
Already the low-interest environment is causing a large volume of existing mortgage customers to take advantage of refinancing their loans while rates remain at historically low levels.
Major lenders are looking to capitalise on the flurry in switching activity, with banks also offering cashback offers to entice borrowers looking to refinance.
One of the distinguishing features of the current rash of home loan activity is that high quality borrowers are being targeted with better rates compared to riskier borrowers.
One example is the ultra-low 1.89% rate from Reduce Home Loans, which is only available to borrowers who have a loan-to-value ratio of 60%.
With borrowers already having 40% equity in their property, the risk of negative equity or the loan going bad is much lower.
Bad news for savers
What is good news for borrowers is, of course, terrible news for savers and the outlook for those with money in the bank has rarely been worse.
The banking system has been flooded with cheap money and returns on deposits have been falling very quickly.
The expanded $200 billion emergency facility from the Reserve Bank has exacerbated that situation with the banks able to tap into that ultra-cheap money as they slash deposit rates and the cash keeps rolling through the door.
During the pandemic, savings rates have also gone through the roof, hitting almost 20% of salary as households batten down the hatches and prepare to weather for the recession as best they can.
Competition for deposits a thing of the past
Faced with a flood of almost costless deposits, the big banks are doing what they do best – shovelling the cash out the door in the form of loans as they slash interest rates on deposits to the bone.
The rash of “introductory’’ rates on offer back in March are now largely gone and savers face a bleak task when they shop around for a reasonable term deposit or at call rate.
Some have taken to the share market as the only reasonable refuge of positive returns – hopefully fully aware of the increased risks they are taking – while others are simply resigned to take whatever they can get from banks that realistically have no real need to compete for their deposits.