ME Bank will tomorrow reduce its five-year rate to 4.94 per cent, undercutting the major banks record low fixed mortgage rates.

Last week Commonwealth Bank cut its five-year fixed mortgage rate to 4.99 per cent sparking a price war, with Westpac and NAB following suit.

Competition in the $1.3 trillion lending market remains intense as interest rates remain at record lows and costs fall on wholesale funding costs and falling term deposit rates.

ME Bank CEO Jamie McPhee told Fairfax fixed interest rates were “very, very close to the bottom”.

He said the swap rates that banks used when setting fixed rates had “probably” bottomed.