Mortgage war escalates

Westpac cuts one-year fixed rate home loan to 4.79%

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Westpac Banking Corporation (ASX: WBC) has taken the next step in what could become a 'mortgage war', after launching a one-year fixed rate home loan at 4.79%, its lowest rate in many years.

ANZ Bank (ASX: ANZ) upped the ante earlier this month by cutting 0.27%, 2 basis points more than its competitors and the official cut by the Reserve Bank of Australia (RBA). ANZ has a smaller Australian home loan book than its counterparts, and wants to grow its market share. Commonwealth Bank (ASX: CBA) has the largest share with 28% with Westpac on 22%, followed by ANZ , and then National Australia Bank (ASX: NAB) with 15.2%.

All four banks want to grow their mortgage books with wholesale funding costs at low levels, and profits from new mortgages at record highs according to UBS analysts. Competition in the $1.3 trillion home-loan market between the majors is fierce, and even small gains in market share can lead to outsized returns.

Of course they don't have it all their own way, with Macquarie Group (ASX: MQG) partnering with Mark Bouris' Yellow Brick Road (ASX: YBR), and offering to undercut the major banks' variable rates.

Most customers however, don't pay the banks' headline advertised rate, taking packages such as bundled credit cards and savings accounts in exchange for lower rates. Banks also utilise different brands to sell cheaper mortgages, such as NAB's U Bank and Westpac's Bank of Melbourne and St George brands.

With official cash rates at all-time lows and predictions by economists that they could sink further, home buyers appear to be coming back into the market. The Australian Financial Review reports that Sydney's auction clearance rates at three-year highs, and Melbourne's rate above 70%, despite rising unemployment and deteriorating consumer confidence.

Foolish takeaway

It seems investors are after yield, and we've already seen the recent run up in high-yielding stocks on the ASX. Now it appears that investors are looking at rental yields of above 5%, which are attractive, compared to current term deposit and savings account rates. With more demand for home loans, expect the other major banks to fire back over the coming months as they look to protect their market shares.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned.

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