In what has been described as the mortgage market's most competitive 12-month period in the last 20 years, home buyers are benefitting from interest rate discounts of more than 1% off their mortgages.
With interest rates remaining at a record low of 2.5%, the major banks have increased their competitiveness to win over customers by offering enormous discounts from their loans. In fact, data compiled by mortgage broker AFG shows that Westpac Banking Corp (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ) and Homeside group, a subsidiary of National Australia Bank Ltd (ASX: NAB), are offering discounts of between 0.85% and 0.94% on variable loans.
Going one step further is Macquarie Group Ltd (ASX: MQG), which is offering customers a discount of 1.01% for loans between $500,000 and $750,000 in value as the bank aims to rapidly expand into the residential mortgage business.
While the discounts are good news for customers aiming to take advantage of already low rates, the banks' activities are sure to catch the attention of the federal government which is getting set to undertake the largest enquiry into the financial system in over 17 years, dubbed 'the Son of Wallis". The dominance of the big four will come under scrutiny as others in the industry, such as Bendigo and Adelaide Bank Limited (ASX: BEN), struggle for market share.
Although the group reported a 9.5% increase in first-half cash profit on Monday, it also recognised a substantial slowdown in loan growth from 4.7% to just 2.3%.
Foolish takeaway
The banks have delivered investors with enormous returns in recent years with their profits soaring due to the low interest rates and low bad debts. While each are fantastic and well-run businesses, investors need to be aware that bad debts and rates will rise in the future, which will impact on their ability to keep growing profits.
Each could certainly continue climbing in the short term, but I believe their ability to deliver market-beating returns are limited.
