Fixed rates have been tipped to keep falling after ME Bank undercut the majors by dropping its five-year rate to 4.94 per cent.
ME Bank announced yesterday that it had cut its five-year fixed rate from 5.39 per cent to 4.94 per cent.
It followed the Commonwealth Bank’s decision last week to reduce its five-year rate to 4.99 per cent, which was then matched by Westpac and NAB, as well as Citibank, Suncorp and Bank of Melbourne.
ME Bank said it had “again out-cut the big banks” and had “much better” five-year rates.
HSBC chief economist Paul Bloxham told The Adviser that “effective mortgage rates are now around their lowest levels ever”.
“What’s happening at the moment is the global economy is still flush with liquidity and that’s pushing down the cost of funding, which is flowing through to the fixed rates that are being offered in the mortgage market in Australia,” he said.
AMP Capital chief economist Shane Oliver said he wouldn’t be surprised to see five-year rates fall below 4.90 per cent.
“The five-year swap rate, which is like a five-year wholesale borrowing rate, has been at about 3.20 per cent, so conceivably rates could still go a little bit lower,” he said.
However, Mr Oliver said he wouldn’t expect the five-year rate to fall by more than 10 basis points unless a sharp deterioration in the global economy drove down borrowing costs.
Mr Oliver said the banks that had cut their five-year rates would probably enjoy only a small increase in fixed-rate business.
“It might help get some first home buyers back into the market, but I think at the end of the day, the bigger impact would be on their margins,” he told The Adviser.
He added that the positive coverage around the fixed-rate cuts might motivate people to walk into bank branches, where about 85 per cent of customers opt for variable rates.
[Related: Fierce competition forcing banks to cut rates]