Additional risks for high LVR lending recognised by new margin imposed by a major bank

Westpac has introduced a new low equity margin tier for lending between 80% and 85% loan-to-value (LVR) mortgages.

The change, to be introduced next Tuesday, will mean all new lending between 80% and 85% LVR will have a low equity margin of 0.25% pa added to the carded/agreed loan interest rate.

All other low equity margin tiers will remain unchanged.

A Westpac spokesperson confirmed that the new charge would apply only to new lending. It would not apply to existing clients with a current LVR of between 80% and 85%.

Prior to this announced change, Westpac had applied a low equity margin only to all lending over 85% LVR.

Low equity margins are imposed by all lenders, although each has their own criteria.

ANZ impose +0.50% "Low Equity Premium" when the LVR is 85.01% to 90.0%, and +1.25% for LVR lending of 90.01% and above.

ASB say they apply a "Low Equity Fee" ... "when you have less than a 20% deposit". The amount of this fee "varies", they say.

BNZ says a "Low Equity Interest Rate Premium may apply".

Kiwibank's "Low Equity Fee" is +0.50% of the loan amount for LVR loans above 80% but less than 85%, is 0.75% of the loan amount where the LVR is between 85% and 90%, and above that you need to pay Lenders Mortgage Insurance premiums.

Westpac says it has introduced this new tier to reflect the additional risk for lending "in the high LVR space".

The Westpac low equity margins compare as follows:

  ANZ ASB BNZ Kiwibank Westpac
where the LVR is ... % % % % %
80.00% to 85.00% (new) 0.00 +0.25-0.50 0.00 +0.50* +0.25
85.01% to 90.00% +0.50 +0.50-0.75 +0.40 +0.75* +0.50
90.01% to 95.00% +1.25 +1.00 +0.50 LMI +0.60
above 95% +1.25 +1.20 neg. LMI +0.75

(* Kiwibank charges this as a fee based on the loan amount rather than as a premium on the interest rate as the other banks in this table do.)

Low equity margins are added to all base mortgage rates and apply for as long as the total loan exceeds the LVR limit. They are automatically adjusted or removed as the LVR changes, usually as a result of principal repayments by the customer. They can also be adjusted or removed if the property 'value' rises, although it will usually require the client to get and pay for a valuation that meets the bank's standards.

See all banks' advertised home loan rates here.

A quick summary of current home loan carded interest rates are in this table:

  1 yr 2 yrs 3 yrs 4 yrs 5 yrs
           
ANZ 5.19% 5.45% 5.80% 6.10% 6.30%
ASB 5.19% 5.45% 5.75% 5.95% 6.25%
BNZ 5.25% 5.40% 5.80% 6.10% 6.30%
Kiwibank 4.99% 5.25% 5.65% 5.99% 5.99%
Westpac 5.19% 5.40% 5.90% 6.15% 6.25%
           
Co-op Bank 4.99% 5.35% 5.75% 5.99%  
HSBC Premier 4.99% 4.99% 4.99% 5.50% 5.75%
SBS / HBS 4.99% 4.99% 5.65%   5.99%
TSB 5.25% 5.30% 5.75% 6.10% 6.30%

TSB Bank has a Special 15 month offer of 4.95%.

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(Updated: Headline corrected: changed from referring to "low LVR lending" to "high LVR lending". Thank you Andrew in Finland.)

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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26 Comments

So what happened to the borrowers funded lenders mortgage insurance. Was that not extra cost enough....

We would gave been more impressed if bank was requiring accelerated cap repayments, rather than increase interest rate margin they earn...

Aha!
So that's how it will work.

The trading banks will do the Reserve Bank's job for it.

Instead of the RB bringing out new macroprudential tools, the banks will bring in their version of
"controls" to slow down lending by upping the price of a mortgage.

No doubt a little chat over a cup of tea was all it took to shift the onus off the RB onto the banks so as to take the politics out of the equation.

and charge handsomely....
 

The headline should say 'high LVR lending'   and not 'low LVR lending'

You are right ! Changed now.

And the punters will happily pay the low equity fee and the banks will make even more obscene profits. 

Comment appears odd givn NZ and Aussie Banks came through the GFC very well.
I can't remember one bank going under or being very close to it?
Actually did any banks make a loss?
 
 

Every set of financial accounts I have seen where businesses of any type generate profits in all types of market and economic conditions (not just banks) tend to be very stable businesses.
Never seen a business which makes losses to be stable!!!! (or last long).
Bank need to retain profits to fund future growth (capital requirements) and fund huge amount of capital expenditure in both physical (buildings / premises etc) and non physicial assets (software / IT etc).
I thought we have undergone a correction in property market 2008 to 2010 (give or take) and where i live in provinical NZ property prices are just (and not in all cases) reaching peak of the market circa 2007.
Poor lending practices is not just about LVR: its about be clear the the first source of repayment of a loan is income (capacity), also the person is of character to repay the loan and failing the first two there is security to recover the loan.
High LVR lending acknowledges that upon realisation of security there may be  a shortfall but this should be covered via collective LEF fees or by additional margin on loan.
Apart from the BNZ in late 1980's when was there an unstable bank in NZ which was, I agree, brought on by very poor lending practices and the Govt got all of its bailout money back. (Funny that a Govt owed bank at the time was the only one who has really got in the brown stuff. Commonwealth Bank is Aussie was a dog of a bank until it got privatised. Stange that private shareholders want to protect their money and the best way to be that is to have a profitable and financial strong / stable operation).

Kimmy,
Where are banks calling for higher rates? Please direct me to website or other.
The Banks did not call for rates to rise to 10%. It was driven by ORC, one of the components of COF.
From what I saw getting 100% loans was not indiscrminately as you state: if you have evidence please present.
Banks work on a percentage margin (COF +) not a GP margin so there is no benefit to them having higher rates. (Please explain if you think otherwise).
The Govt guarantee was nothing to do with property values: it was due to a possible flight of capital resulting in funding difficulties. As it was Bank reduced their lending during this period due to just getting fundin linesg, let alone wrong about the cost. (hence introduction of CLR)
Remeber to first party to lose any funds in an insolvent bank are the shareholders: why would they manage their business to lose their own funds???

From HT
The credit supply is debt...it has interest attached...that is a demanded rate of growth...and this tax on credit...forces the users of credit to constantly request more and more to pay the tax...

From HT
The credit supply is debt...it has interest attached...that is a demanded rate of growth...and this tax on credit...forces the users of credit to constantly request more and more to pay the tax...

lol money man, u serious? are u comparing normal businesses (below) to banks, who can create currency, and do so many times more than the RBNZ? if a bank who creates money doesn't make a profit, something is not a bit wrong, its beyond dead.

all the more reason to have your mortgage with a NZ-owned bank - let the profits stay in our country, and work for us!

It might not matter if this story unfolds with the wrong conclusions - that is, no amount of fiat money will be enough to satisfy the demand for gold.
 
The absolute collapse in JPM's eligible gold inventory, means total Comex eligible gold has fallen to just 5.8 million ounces, half of what it was in early 2011, and back to levels last seen in March 2009.
 
The story of the gold basis needs to be told to every potential bank creditor.
 
The relentless contraction of the gold basis means that gold available for future
delivery is fast disappearing. Gold is constantly moving into strong hands that hold
on to it and will not relinquish it even in the face of steeply rising prices.

Eventually the gold supply dries up and sporadic backwardation gives way to
permanent backwardation
. Gold mines refuse to take paper money for their
product. If you want to have gold, you will have to have recourse to barter.

Permanent backwardation means that confidence in fiat paper currency and
government promises to pay has evaporated. After all, considering their origin,
irredeemable bank notes are nothing but dishonored promises to pay gold.
 
 

And again, differences between how these banks are required to be prudent in their lending in Australia, but use their operations here to generate immediate profits to be expatriated to Australia.   The RBA is doing their job - the RBNZ not so much.
 

In Australia high LVR lending is required to have Lenders Mortgage Insurance - to protect the bank from loan defaults (and hence protect depositors - putting the risk where it is generated).
 
“For borrowings more than 80% of the value of the property, the borrower will also have to pay a one-off ‘Lenders Mortgage Insurance’ (LMI) premium to cover/protect the lender, if they default on their loan.”
http://www.yourmortgage.com.au/article/how-to-qualify-for-a-high-lvr-loan-79504.aspx
 
Hence Australian banks are able to provide $250,000 deposit insurance for each Australian depositor.  
In NZ, the same banks charge a higher interest rate for high LVR loans - which generates immediate profits, but does nothing to protect the depositors.   An unintended moral hazzard of the OBR scheme. The RBNZ should rein in the push by NZ banks to have more high LVR loans.

Banks like Countrywide who lead the market in 80% plus lending from early 1990's used Indeminity Companies to underwrite their risk but then Banks started to self insure.
Be interested to know with this extra interest or LEF fees are taken into profit or held as provisioning to cover losses in these loans. I suspect LEF (low equity fees) are taken into profit over a period of time and when these loans go bad and losses eventuate then it comes off the profit.
I don't have a problem with LEF loans providing they are priced for risk (LEF or interest margin) but these must be used to protect deposit holders, not to increase profit.
 

Kimmy - rather than plain rethoric,  it would be useful if you could give us your definition of obscene profits and where the banks fit into the spectum of NZ companies ?

HSBC offer a 5yr fixed mortgage at 2.49%  
Now thats a genuinely low rate in accordance with global recessionary conditions. 
Sorry, only in the UK.   NZ-ers pay double/triple rates.   

MortgageBelt do you actually understand why that's case or is it a question youre asking, as otherwise it seems like a total dumb arse statement to make from anyone with half an understanding of what dictates rates in one country or another.

Yeah HSBC, what a grand organisation they are:
In December, HSBC agreed to pay a $1.3bn fine to the Department of Justice and a further $665m to US regulators to settle money-laundering and sanctions breaches following a five-year investigation. It also signed a five-year deferred prosecution agreement to prevent a trial over the affair.
On Thursday, after detailing the allegations against the bank, Ms Warren asked the US Treasury’s top antiterrorism official “what does it take” for enforcement authorities to take more drastic action.
How many billions of dollars do you have to launder for drug lords and how many economic sanctions do you have to violate before someone will consider shutting down a financial institution like this?” Ms Warren asked.
http://www.ft.com/cms/s/0/e394ea40-8750-11e2-bde6-00144feabdc0.html

Still, you gotta admit 2.49% over 5 years is a darn fine rate. 
UK, USA, Singapore, HK, Canada, Taiwan,Japan  all have rates close to zero. 
Note: 2008 brought changes globally, still unacknowledged by NZ govt & RBNZ & bank economists. 

Kimy
A recent report shows what is already public information, NZ bank profits sit in the middle of the top 100 NZ publically owned companies. Of course you may think NZ public companies make to much money ?
 MortgageBelt interest rate comparison are just day dreaming and ignore:
- NZ GDP 3% (1.5% last qtr alone) - UK 0.5% (4 of the last 6 qtrs being negative) just narrowly avoids triple dip recession in Q1 2013
- NZ unemployment  rate 6.9% - UK 7.9%
- NZ house price since 2007 peak, no peak, up 8% annual, Akld 13% -    UK down 18%
- NZ RBNZ money printing to suppress interest rates, zero - UK, GBP375bln
- NZers savings rate - NZ banks forced to borrow overseas one third of NZers comitments - UK banks, self funding (i.e. no premium paid)
- Size of NZ FX market compared to UK FX market - minute i.e. market liquidity to extract funding from NZ inferior requiring interest premium
There are other comparisons but anyone who thinks that warrants a level of interest rates on the same plain as the UK clearly does not understand the interest rate markets.
 
 

screwed up, twice

Great KPMG accounting story conclusion in the FT
Looks like it was all a one day wonder , a result of a slow news week,
http://www.ft.com/cms/s/0/cdbae386-abfa-11e2-9e7f-00144feabdc0.html#axzz...
 
Comments section is excellent.
 
Why is global oligopoly of auditing firms allowed to exist? How can it be substituted and replaced?

"one-day wonder” and ... “It is very difficult to deal with one rogue guy”. I cannot believe that the managing partner of a Big Four accounting firm can actually say this. His partner, Mr London, was head of a very big part of his business. The clients are substantial listed companies.
If this is his attitude to peer reviews and internal quality controls in his firm, I fear that KPMG will go the same way as Arthur Andersen, its just a matter of time.

The banks provide a service.  If you don't like the service they provide or the charge of the service; don't use them.  No one is forcing you to borrow money. 
 
If all this whining is about the profits going overseas, get a Kiwibank account or other NZ provider. 

Happy123, far too much bother for most to shift banks.  Much easier to just have a whinge on interest.co. 
Get a bit sick of those commentors that don't have a clue about the NZ banking market even though there are some that are clearly deeply involved, such as Grant A, who try their best to explain how it operates.
Kimy is buying into the media hype about record profits.  What's the return on assets relative to previous years and other industries?  We have to shift away from measuring in absolute dollars - but where's the sensational media in telling the full story!