People walk out of a Commonwealth Bank of Australia branch in Sydney, Australia, August 12, 2015.
People walk out of a Commonwealth Bank of Australia branch in Sydney, Australia, August 12, 2015. Reuters/David Gray

Commonwealth Bank, Australia’s largest lender, has declared it will drop interest rates for owner occupier principal and interest rates by three basis points to 5.22 percent. It means a customer with a $350,000 mortgage can save $78 per year.

Meanwhile, it will hike interest rates by 0.3 percentage points for property investors and owner-occupiers who pay only interest on their loan. The lender, along with other banks, tries to encourage more borrowers to switch to principal and interest loans.

Among the big four, CBA announced the smallest drop to this type of loan. It was also the last among the big four to make an announcement this month.

The changes, CBA said, were a response to the crackdown on interest-only borrowing that has prompted banks to charge a premium to customers with interest-only loans, not due to the federal budget's bank tax. In March, the Australian Prudential Regulation Authority obliged banks to cut the proportion of new home loans that are interest-only to less than 30 percent.

The lender said it backed up the policy to manage the "level of growth and resiliency in the housing market.” It said its changes would result to a rate cut for 80 percent of its owner-occupier customers.

Interest rates for property investors paying back principal on their loan will remain unchanged. The changes are slated to take effect from July 7.

CBA’s announcement comes after NAB increased rates on interest-only loans by 0.35 percentage points for property investors and owner-occupiers on Friday. Last week, Westpac also announced it raised rates by 0.34 percentage point for interest-only customers, while ANZ hiked by 0.3 percentage points.

The 0.03 percentage point reduction in principal and interest rates by CBA is smaller compared to the 0.08 percentage point cuts for the same group of customers at NAB and Westpac. ANZ announced a 0.05 percentage point cut.

Matt Comyn, CBA’s group executive of retail banking services, acknowledged it is important for Australians to pay off their homes. He said owner-occupier customers repaying principal and interest can use their interest rate reduction to pay off their home loan more quickly.

"These changes also help us keep the right balance in our home loan portfolio, in line with what our regulators require,” he added. Meanwhile, Otto Dargan, Home Loan Experts’ managing director, noted there were increased incentives for borrowers to opt to make principal and interest repayments, reports.

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