Westpac Banking Corp (ASX: WBC) has reportedly joined the Commonwealth Bank of Australia (ASX: CBA) in cutting the normal discounts offered to new customers on their mortgage interest rates.

According to the Australian Financial Review (AFR), Westpac says it will reduce its mortgage discount by 0.2% for various loans to both owner-occupiers and investors, and at the same time will also end a $1,250 rebate to customers for refinancing.

Commonwealth Bank cut 0.15% off its discounts, with both banks blaming higher funding costs according to the AFR. The two largest banks have also cut their five-year fixed rates. Australia’s banks have made several moves to offset their higher funding costs, this is just another.

Most mortgage borrowers don’t pay the headline interest rate advertised on mortgages, receiving discounts of up to 1% off the standard variable rate – which makes the big four banks’ home loan interest rates more competitive with small regional and non-bank lenders.

Westpac and CBA control about half of the home loan market, with Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) holding around 30-40% between them. The latter two are likely to follow the moves of Westpac and CBA, given their tendency to copy rival’s decisions in the home loan market.

CBA’s standard variable rate is 5.22%, but several non-bank lenders are offering mortgages with interest rates or less than 3.8%, including Heritage Bank, Bank Australia, Australian Unity, NAB’s U Bank and IMB Bank, according to ratecity.com.au.

The moves by CBA and Westpac don’t affect existing customers, but will impact on new customers – unless they choose to go elsewhere – which could see the banks raise their discounts and increase competition again.

Foolish takeaway

The lesson – as usual – is that the big four banks have a dominant position in the mortgage market and borrowers should really look elsewhere for cheaper loans to save themselves thousands in interest costs.

 

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.