Westpac shakes up mortgage market with unprecedented 4.99% rate
Westpac has introduced a three-year fixed mortgage rate of 4.99%, marking the first time this cycle that a major bank has dipped below the 5% mark.
Announced on Wednesday and effective immediately, this rate is seen by analysts as an aggressive strategy to capture market share in a segment that typically sees less competition.
Economic analysis of the new rate
Gareth Kiernan (pictured above left), chief forecaster at Infometrics, expressed skepticism about the sustainability of such a low rate, RNZ reported.
Kiernan said that if other banks were to follow suit, “it would take the margin between the three-year rate and three-year swap rates to the lowest since October 2023.”
He highlighted the historical context, saying, “The margin across any swap-mortgage rate pairing has only been below the 1.6 percentage points implied by Westpac’s rate between August 2021 and October 2023,” a period affected by unusual monetary policy measures like the large-scale asset purchase programme and funding for lending by the Reserve Bank.
Market reactions and predictions
While other major banks currently offer special rates around 5.59% for three years, Kiernan doesn’t foresee them matching Westpac’s rate publicly.
However, he suggested that “if you were looking to fix or re-fix with them, they might offer the same rate of 4.99% if asked.”
David Cunningham (pictured above right), CEO of Squirrel, predicted that Westpac’s rate would significantly attract business, prompting competitors to potentially match the rate “below the line” to retain customers.
Cunningham said that the pricing of Westpac’s 4.99% rate aligns more closely with long-run margin trends, suggesting that this could signal a normalisation of margins which have been elevated for several years.
Implications for the market
Cunningham also foresees a decrease in term deposit rates, possibly falling below 4% in the coming months. He regards the introduction of sub-5% rates as very positive news for borrowers, highlighting a significant potential reduction in mortgage interest costs.
“There’s a $4 billion per annum reduction in mortgage interest costs gradually emerging as the 80% of floating or fixed mortgages reprice this year,” he told RNZ.
This adjustment could lead to a 20% reduction in the interest component of mortgage payments, based on the current average mortgage rate of about 6.25% on the $370bn of home loans.
Jeremy Andrews, a mortgage adviser at Key Mortgages, said that he had yet to see other banks match Westpac’s rate, indicating a cautious wait-and-see approach among competitors, RNZ reported.
