A price war in Australia's mortgage market is underway with National Australia Bank (NAB) today following ANZ and Aussie Home Loans in reducing its interest rates on home loans.

NAB announced it was dropping the interest rate on its standard variable home loan by 20 basis points to 8.36 per cent.

The cut will also apply to business loans and some rates on fixed mortgages will be reduced by 30 basis points, the bank said in a statement.

NAB's one-year fixed home loan has been cut by 30 basis points to 6.99 per cent.

Policy measures taken by the Federal Government earlier this month have had a positive impact on the credit market, enabling the bank's funding costs to fall, Ahmed Fahour, executive director and chief executive of NAB's Australian operations said.

"We welcome this new development and anticipate that we will see some relief in the significantly higher premium we are currently paying for wholesale funds.

"Should this be the case, then we hope to be in a position where we can pass on further interest rate cuts to our customers," he said.

NAB's announcement came hot on the heels of Aussie Home Loan's decision yesterday to drop its rate on variable home loans for first home buyers by 30 basis points to 7.79 per cent.

Aussie Home Loans reduced interest rates for fixed home loans and will review its loan rates for new and existing customers in line with its funding requirements, managing director John Symond said.

On Friday, ANZ lowered the interest rate on its standard variable home loan by 25 basis points to 8.32 per cent for new and existing customers, effective from Monday, October 27.

ANZ's move was the first move to rates independent of the Reserve Bank by a banking institution in over a decade.

Rates on standard variable mortgages from Australia's major lenders in the banking sector now stand at 8.32 per cent at ANZ, 8.36 per cent at National Australia Bank, 8.53 per cent at Commonwealth Bank, 8.56 per cent at Westpac, 8.57 per cent at St George Bank, and 8.6 per cent at Bendigo and Adelaide Bank.

Australia's major lenders in the banking sector reduced their variable home loan rates on October 7 in reaction to the RBA's surprise 100 basis point rate cut, and said further cuts would be dependent upon their funding costs from offshore wholesale money markets.

Today, Goldman's chief economist Tim Toohey said the US commercial paper markets - where banks source much of their funding - had improved which would see banks' funding costs fall, allowing them to pass on a greater proportion of future RBA rate cuts.

"There's a very important development that's occurring in terms of opening up of the commercial paper markets in the US," he said.

"If those spreads start to come in, we actually do think that the spreads that matter for the banks or the banking system will in time start to come down as well.

"So [the banks] have held a little bit back... as we move forward from here, we see a smaller case for them to actually continue to hold back."

- AAP