BANKS are battling it out for fixed-rate mortgages as expectations grow of a cut to official cash rates next month.
Westpac has become the latest to cut its fixed home loan rates. This morning it cuts 20 basis points off its one-year fixed loans to 5.69 per cent.
It has also slashed 30 basis points from its three-year fixed loans, taking the new rate to 5.54 per cent.
Westpac matches its big four rivals on one-year fixed rates, while undercutting Commonwealth Bank over three years and longer.
The changes in fixed rates do not affect variable mortgage rates, the most common form of home loan in Australia. Even so, the jostling on fixed products has led to their pricing at a substantial discount to variable rates.
Fixed rates are priced on futures markets and as expectations build of cuts by the Reserve Bank to official cash rates the cost of fixed funding falls.
Economists expect official cash rates to be cut as much as 75 basis points over the next year to help offset a slowing global economy and falling commodity prices. This could lead to a fall in official cash rates to a cyclical low of 2.75 per cent. Some tip the cutting cycle will start next month.
The share of mortgages at fixed interest rates is now about 10 per cent, down from a peak of 15 per cent in March.
At the start of this year, uncertainty surrounding the repricing of mortgage rates prompted many to rush to lock in fixed rate loans.
Overall, Australian mortgage growth is at three-decade lows, while business credit remains flat.
Banks are grappling with higher funding costs as they pay more for deposits and wholesale funding. Combined, this is pressuring pricing across variable mortgages.
But with demand for loans subdued, the banks have not needed to return to the markets as much.
Traders are pricing in a 76 per cent chance the Reserve Bank will cut the official cash rate by 50 basis points by the end of the year, which would lead to a fall in the rate to 3 per cent.