While the big four in Australia in 2012 defied the Reserve Bank of Australia's (RBA) policy decision on overnight cash rate by pocketing some of the rate cuts instead of passing it fully to borrows, the banks appear to have a different approach for 2013.

In a moved the surprised Australia's banking community, the lenders are cutting their fixed-rate loans even if the RBA just retained the current 3 per cent overnight cash rate on Tuesday.

Westpac fired the opening salvo of the loan rate war by reducing the interest rates of its two-year fixed rate home loan by 40 basis points. With the move, Westpac's new rate for that type of loan is down to 4.99 per cent, the lowest level since April 2009.

Responding swiftly to Westpac's initiative, ANZ also reduced its two-year package deal to 5.29 from 5.34 per cent.

The twin moves are expected to benefit Australian borrowers, most of whom are on package deals which are the banks' best deals. In comparison, Westpac's lowed standard variable rate is 5.81 per cent. By switching from standard variable rate to the new fixed rate, borrows with a $300,000 mortgage could save $290 a month in their amortisations.

Loan Market, a mortgage broker, said that with most lenders cutting their fixed-rate products' interest rate by 40 basis points, many borrowers have moved from variable rates.

Ahead of Westpac's move, the Commonwealth Bank of Australia reduced its one-year fixed rate by 15 basis points to 5.19 per cent and three-year fixed rate by 10 basis points to 5.29 per cent. Also on Thursday, the CUA cut by 20 basis points its three-year fixed-rate to 5.3 per cent.

St George, a subsidiary of Westpac, likewise cut its one-, three-, four- and five-year fixed rate mortgages, lowering between 5.15 and 5.69 per cent interest rates for borrowers on the bank's advantage package.

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