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Australia's mortgage market to be reshaped by near-zero rates

[SYDNEY] Record low rates in Australia are reshaping the A$1.78 trillion (S$1.73 trillion) home loan market as customers are drawn to lower-margin fixed-rate loans in a country where variable rate mortgages are the norm, a senior banker said on Thursday.

Ross McEwan, chief executive of third-ranked lender National Australia Bank (NAB), said interest rates near zero would hurt margins and banks' loan-books, their biggest assets, could start to look more like those of peers in Britain.

"Remember the UK - which still is a very fixed-rate market as opposed to a variable - banks still make good money out of that," Mr McEwan, who previously led Royal Bank of Scotland, told analysts on an earnings call.

The Reserve Bank of Australia cut the official cash rate to 0.1 per cent on Tuesday and said it did not foresee raising rates for at least three years.

The country's largest banks responded by slashing rates for fixed mortgages, but have so far not passed the cut to variable rate mortgage holders, who are vast majority of their existing home loan customers.

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From Nov 10, NAB will cut four-year fixed-rates for home loans to 1.98 per cent per year, a record low and 69 basis points below the 2.67 per cent variable home loan rate Mr McEwan said the bank charged.

Its three major competitors, which are also able to fund at the 0.1 per cent cash rate, are all offering similar rates on fixed loans.

That means that they are now competing to lock in a margin of about 1.9 per cent on a fixed-rate loan, compared with about 2.6 per cent on a variable loan in NAB's example.

"We now have a very large gap between fixed rates and standard variable rates of up to 100 basis points, so if customers keep switching to fixed products, that creates a significant margin headwind," said Jarrod Martin, a senior banking analyst at Credit Suisse.

Mr McEwan said he expected the share of fixed-rates loans to rise to above 30 per cent of mortgages for NAB from about 10 per cent in previous years.

If handled well, the growth of fixed-rate loans in Australia should not be as bad as feared, because they were shorter periods than in Britain.

There were added benefits of lower administrations during the set periods for fixed-rate mortgages.


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