Mortgage rates: Are they taking us for a ride?

Mortgage rates: Are they taking us for a ride?

Do we have decent competition in the mortgage market here? Are the banks as ready to sharpen their pencil as they across the Tasman? Looking at the numbers, you might wonder if we're being taken for a bit of ride. New Zealand’s banking base rate – the official cash rate – is 1.75% and until recently was 2%. Australia’s is 1.5%. So yes, you might expect the mortgage rates in Australia to be a little bit better than New Zealand. But this much?

At today’s date, November 29, www.loans.com.au are offering 3.39% variable. The best rate you’ll find on offer at advertised rates in New Zealand is currently 4.29% on a two-year fixed rate from New Zealand Home Loans. Looking over the spread of rates at www.mortgagerates.co.nz, the numbers range from the mid fours to the low sevens.  We asked business commentator and Hive News Publisher Bernard Hickey: are New Zealanders are being taken for a bit of a ride? Does Australia maybe have more lenders and keener competition, and do people get a better mortgage deal here than in New Zealand?

Bernard Hickey
Business commentator and Hive News Publisher Bernard Hickey

“One of the differences is that the Australians tend to do floating mortgages and we tend to do fixed,” Bernard says. “So to compare apples with apples really you have to look at New Zealand fixed rates versus the Australian floating rates.”

The Australian floating rates are the best deals on offer, Bernard says. In New Zealand the fixed rates tend to be the best deal.

Okay, but on that basis, the best advertised New Zealand deal we could locate today was 4.29%. The best Australian was 3.39%. Doesn’t that at least suggest the banks might be taking advantage of a lack of competition here?

“I think there is bit more competition now than there was a year or two ago, ” Bernard says. From about 2003 to about 2009 “Kiwibank really competed hard to try and win market share off the other banks and force the mortgage market share wars, which actually brought down net interest margins quite a lot.

“From about 2011 onwards because New Zealand Post and the Government didn’t want to put a lot more capital in Kiwibank dialled back on the competition.

“So the bank wasn’t quite as competitive between 2011 and 2015. But in the past two years until about 3 or 4 months ago, the banks were getting a lot more competitive and driving interest rates down. That’s one of the reasons why particularly last year you saw lending growth pick up, because the banks were competing quite hard.”

Bernard says the big banks lending interest margins have actually dropped a bit in the last year or so for a couple of reasons:

  1. New Zealanders have shifted from expensive floating rate mortgages to cheaper fixed rate mortgages.
  2. The funding costs how much it costs the banks to borrow money on term deposits and wholesale money markets overseas have got more expensive.

 

“I wouldn’t say that the New Zealand banks are taking us for a ride at the moment. I think they’re trying to increase their interest margins. That’s because they are starting to see the gap opening up between how much money is being lent out and how much is being put in term deposits. In theory the banks they get money in through the front door in term deposits and then they lend out the back door as mortgage lending.”

Ever since the global financial crisis, he says, that money in the front and in the money out the back has been broadly the same, so a bank didn’t have to go overseas to top up. “But the past 6 to 12 months suddenly we stopped saving so much in term deposits and meanwhile the lending growth has substantially increased.”

Why has the saving stopped? He points to a combination of things: baby boomers buying rental properties, owner occupiers doing more renovation, people going on holidays and other spending.

“And also a bunch of people have seen they can get more growth by going for the capital gains. So they have pulled their money out of deposit and bought rental properties and geared up.”

So the banks now have a bit of an issue, he says, and their solution is: offering more in term deposits and “closing the back door for a little bit” by not passing on further rate cuts. If you’re looking for the rates they get in Australia, you might be waiting a while.

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