Banks' rates become even more variable when pushed

Shoppers love a good price war. Whether it's bargain airfares or cheap milk at the supermarket, sudden outbreaks of competition benefit all consumers by pushing prices down across the board.

With home loans, however, things tend to be more complicated. Indeed, events of the past few years suggest that borrowers might not automatically benefit from heightened competition in the mortgage market unless they shop around. When Qantas and Virgin are trying to aggressively steal each other's customers, virtually all domestic air travellers win because fares fall. Banks, however, can be more targeted when trying to pinch customers from rivals.

This is what they've been doing lately. With credit growing much more slowly than it used to, banks have been forced to have a good, hard look at their prices.

Some, such as NAB, made a deliberate effort to offer a lower standard variable rate - the one that is advertised. But this is of limited use because few people actually pay the standard variable rate.

Most borrowers get a discount of anywhere between 0.6 percentage points and 1 percentage point off the standard variable rate, depending on what the bank is prepared to offer them.

Figures from Credit Suisse, used in this week's graph, show all the big banks have increased their discounts since the 2008 financial crisis, with discounts of 0.8 percentage points now commonplace.

If you've taken out a new loan recently, it means you're probably getting quite a competitive rate. But if you're someone who signed a loan contract several years ago, you might not be getting such a good deal.

Why?

Because these discounts aren't automatically passed on to everyone who already has a loan with the bank - that would be hugely expensive for the lenders. Instead, discounts are used as a way to lure new borrowers, or to encourage people to switch from a rival.

It's easy to see why many of the banks prefer to compete this way: it's cheaper and it targets our natural inertia. They know full well that many people can't be bothered shopping around and dealing with the hassle of switching banks, even if doing so would save them money.

It's the same reason banks often have generous "honeymoon" interest rates on savings products, which lapse after a set period.

What does it mean for borrowers? If you want to make the most of the rivalry between banks, you need to shop around. This can mean threatening to switch to a rival unless your bank can match it.

There are substantial discounts on offer in the home-loan market but you'll have to seek these deals out.