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Will the mortgage war hit bank dividends?

Big four bank shareholders may be right to be nervous, as three of the big four cut their fixed rate mortgages to below 5%.

Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corporation (ASX: WBC) and National Australia Bank (ASX: NAB) all lowered their fixed rate mortgages to below 5%, allowing borrowers to lock in low rates for up to five years.

Commbank was the first to move, cutting its 5-year rate to 4.99% – the lowest it has ever been, and was followed shortly after by NAB and Westpac. Australia and New Zealand Banking Group (ASX: ANZ) typically updates its mortgage rates once a month, but it may be forced to follow suit and lower its fixed rate mortgages to remain competitive.

With the Reserve Bank of Australia indicating several times that the official cash rate is likely to remain stable for some time, and falling five-year swap rates, banks are able to borrow funds at record low levels of just above 3%.

With many central banks holding official rates near zero, investors are attracted to Australia’s relatively higher returns, ands that rising demand is forcing the funding rates down.

Those falls in the funding rates means the big four banks may be able to boost profits, despite competing aggressively for new fixed rate mortgage business. Banks are sourcing more of their funding from the cheaper bond markets, rather than compete aggressively for local deposits.

For term deposit holders though, it could mean lower interest rates, should funding rates start to rise again – and another reason why full franked dividends are a better option for many investors.

So it seems the banks’ dividends are safe, for now anyway. I can hear those sighs of relief already!

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