Lower Interest Rates Will Inject Competition

The Reserve Bank of Australia (RBA) cutting official interest rates to near record lows could lead to unprecedented competition between lenders, says leading mortgage broker Loan Market.

Loan Market Corporate Spokesman Paul Smith said a Melbourne Cup day rate reduction was a strong tip, with federal Treasurer Wayne Swan saying his promised budget surplus offered the RBA “flexibility” to cut rates from the current 3.25 per cent.

Mr Smith said the last time the cash rate was at 3.0 per cent was in April 2009 and was in a quick reaction to the Global Financial Crisis (GFC). He said this time the drop in interest rates has been much slower and from a much lower base.

“With rates falling at a much more gradual pace, lenders have had more time to position products and compete against one another,” he said.

“It’s a completely different situation to the dramatic rate drops in late 2008 and early 2009.”

Mr Smith said the gradual fall of rates has opened up healthy competition between lenders this year and if the cash rate drops to 3.0 per cent or below, there will only be further fuel added to the competitive fires.

“In particular, fixed rates have been an ultra-competitive product because of the downward outlook on rates throughout the year and many lenders taking different approaches to hedging their rate predictions,” he said.

“This past month we saw the first fixed rate product go below 5.0 per cent in many years and it’s likely that we’re going to see a number of lenders quickly respond with even lower rates, even if the cash rate remains at 3.25 per cent.”

Mr Smith said mortgage holders and potential home seekers where best off taking a holistic approach to refinancing their mortgage or purchasing property.

“History does show that when the market is at the bottom of the cycle it can be the right time to lock into a fixed rate,” he said.

“However, before you do lock into a fixed interest rate it is worth running through the pros and cons of doing so and making sure you’re aware of the implications.”