Which big bank is betting that rate cuts are imminent?

More rate hikes coming? Not according to a big bet last week by an institution with a lot to lose.

NAB has become the first ‘Big Four’ bank to cut fixed home loan rates since the RBA lifted the cash rate to 4.35 per cent in November last year – and it’s amid some talk that this hike-cycle may not even be over.

The lender – the country’s third largest behind CBA and Westpac – slashed its three-year fixed rate on Monday by a huge 60 basis points. The massive mortgage move means NAB is now offering the leading three-year fixed rate of all ‘Big Four’ banks. It also means its rate now starts with a ‘5’ – 5.99 per cent.

There are five RBA meetings left before its call on rates next April and NAB economists are forecasting cuts between March and June. Credit: Bloomberg

So what’s driving NAB’s decision, especially when commentators are pretty divided on the direction of interest rates, and how soon could others follow suit?

Firstly, the ‘rate play’ by NAB is designed to help it steal market share from rivals. Mozo spokesperson Rachel Wastell also thinks the aggressive cut “could be a response to ANZ’s acquisition of Suncorp”.

But NAB wouldn’t have acted unless it didn’t also believe these loans would be lucrative and that rates will fall far more than 60 basis points over the next three years.

Think about it: the bank doesn’t start making money until official rates drop a good deal further than its new 60-basis-point discount, and they need to do so early for its new pricing to properly pay off.

Wastell backs up my theory. “This is a clear bid to lure customers by betting on future cash rate reductions,” she says.

“It suggests they anticipate a significant drop in the cash rate over the next few years.”

What’s more, NAB has predicted rates right – in this way – before.

Mozo interrogated the historical data exclusively for Money and found that back in 2011, NAB cut its three-year fix on the NAB Tailored Home Loan by 30 basis points.

This was five RBA meetings before the RBA cut the cash rate. Today, there are five RBA meetings before its call on rates next April and NAB economists are forecasting cuts between March and June.

So the fixed rate change puts NAB’s ‘money where its mouth is’, so to speak, and ‘doubles down’ on the very next rate move being a decrease… because we’ve hit the top.

It all points to NAB feeling pretty secure about where it reckons rates go next, according to Wastell.

“NAB is once again confident in their expectation that the RBA’s next move will be a cut and is attempting to attract customers to that lower three-year fixed rate before other Big Four banks start lowering theirs.”

Note that Westpac has also come out with data suggesting the June consumer price index will come in satisfyingly low – 3.5 per cent – and that we “should not close the door on a rate cut”.

To secure NAB’s 5.99 per cent rate, you need a deposit (or equity) of more than 30 per cent (note that fees push it to a 6.64 per cent comparison rate, which is a fairly common ‘mark-up’ on fixed rates).

Versus the old 6.59 per cent rate, it’s a monthly saving of $186 on a $500,000 loan, or $2229 per year. But NAB’s 60-basis-point slash is across all borrower loan-to-value tiers.

For example, buyers with a 20 per cent deposit can still access a big-four beating three-year fix from NAB at 6.04 per cent (previously 6.64 per cent).​

NAB’s latest rate play would suggest it’s feeling pretty secure about rates are going next.Credit: Paul Jeffers

For borrowers, of course, that’s the fixed rate trap: lenders only offer them if they think the rate play will pay – in other words, home loan holders will end up forking out more by locking in than they would have had they stayed on a variable rate.

When borrowers take this ‘bet’ it’s against their bank, and you know what they say about the house and winning. This is precisely why I only ever advocate fixing half your home loan and only if you can get a fixed rate lower at the outset than the available variable one.

With NAB, that moment is now – and for those seeking the stability of a fixed rate, perhaps because another rate hike would just be a bridge too far, the bank’s offer will be compelling.

In any case, the very welcome news is that rate cuts could – finally – be coming.

Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter or Instagram.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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