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Broad discrepancy between the interest rates the major banks use to test mortgage borrowers' ongoing ability to service their loans

Broad discrepancy between the interest rates the major banks use to test mortgage borrowers' ongoing ability to service their loans

The Official Cash Rate and mortgage rates have fallen this year so what have banks done to the interest rates they use to test mortgage borrowers' ongoing ability to service their loans?

In some cases they too have fallen. However, there's a broad discrepancy between banks with these rates, which are an estimate of potential increases to interest rates in the future.

ANZ, the country's biggest bank, has reduced what it terms its servicing sensitivity rate to 5.80% from 6.65% a year ago. This rate applies to both owner-occupiers and investors.

ASB reduced its test rate in July to 6.45% from 7.2% for both owner-occupiers and investors.

And Westpac tests borrowers servicing ability at a rate of 7.25%, according to CEO David McLean. Westpac hasn't changed the rate this year, and it also applies to both investor and owner-occupier lending.

Neither BNZ nor Kiwibank would provide their specific test rate.

The average two-year bank mortgage rate has fallen to 2.578% from 3.53% a year ago. The average one-year rate is down to 2.428% from 3.45%. And the average floating rate has fallen to 4.19% from 5.24%.

A spokesman says BNZ reviews its test rate quarterly, it's the same for investors and owner occupiers, and it has reduced.

A spokeswoman says Kiwibank's serviceability rates are reviewed from time-to-time in line with what’s going on in the market.

"Kiwibank’s test rate has come down over the last year as market interest rates have reduced and the forecasts are for interest rates to remain low for longer," the Kiwibank spokeswoman says.

"We apply a single mortgage test rate which reflects our estimate of the maximum expected increase in interest rates over the medium term given current and expected market conditions. Test rates aren’t a prediction of future interest rates, they just give us the ability the check the customer can still afford the lending under a reasonable scenario of an interest rate increase."

In comments attributed to Craig Sims, its executive general manager of retail banking, ASB says it regularly reviews and adjusts its test rate to ensure it’s appropriate for the current environment.

"The primary purpose of a servicing test rate is to account for interest rate changes over the economic cycle. While we are prudent when setting our test rate, it’s important to note it’s just one of many factors taken into account when considering whether a borrower can afford their repayments through a full economic cycle. ASB offers a single rate card for home loans, so we don’t differentiate our test rate for different types of borrower," says Sims.

"We revised our test rate in July this year from 7.2% to 6.45%, reflecting the lower interest rate environment. We know that these lower rates allow borrowers to access higher levels of debt relative to their income, and we are mindful of the impacts this could have on a borrower's financial position over the longer-term. With home loan rates being as low as they are, we think it is also prudent to consider debt-to-income multiples in certain lending situations, and we actively use these today."

A Westpac spokesman says the serviceability rate is just one of a number of factors the bank takes into account when considering loan applications. Other factors include income, financial commitments and living expenses.

Mortgage rates

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20 Comments

It’s all getting a bit nanny state isn’t it? Fair enough if you have low equity but otherwise it is a secured loan can’t the borrower decide if they can afford the repayments rather than the bank applying formulas?

Because FOMO wont make them make bad decisions? Interest rates change - it would be foolhardy to base 30 year affordability on current interest rates.

Dumb question.
If borrowers have to be able to service interest rates around 6% -7% ( not much less than the past couple of years from personal experience) then the current mortgage rates of 2.5%-3% can't be used as justification for the rapid increase in house prices can they?

They’ll find a way to give you the loan regardless, they just make you jump through hoops to prove they are “being responsible”.

In commercial world, banks generally not differ to those from Nicotine or Alcohol industries. Every levers being pull up/down/sideways to ensure the steady maximum return of the investment.
Better to join the master across the ditch, and looking/controlling from behind in the golden chariot pulled by donkey & horses in the front.

I remember when going under 10% interest rates for mortgages was a big thing which was in the 90's. Since then house price inflation has got out of control. NZ has plenty of land, and plenty of materials and wood etc to build them So why are we paying more than the rest of the world? They need to make new builds GST free. It is starting get cheaper to build, as long as you can find the land and it isn't over priced. Land seems to be far too controlled in NZ.

According to the RBNZ C5 stats, housing loan growth is literally at an all time high of around $20 billion/year! whereas business and consumer loans are shrinking with a growth rate of around -$3.5 and -$1.8 billion/year respectively. It's great that the banks are still bothering to test serviceability, but don't the numbers seem weird? This is definitely a housing & fiscal spend led recovery.

Yes, if by recovery you mean struggling to get GDP back to where it was, but with even deeper piles of private and public debt.

Well as long as the debt is used to finance completely unproductive things with no future revenue streams, then surely we should be okay... But who cares about the economy anyway. All that matters is that your house is goes up by at least 10% pa.

Exactly. And as I read your comment the ads on the right are all about garages, tents and caravans. At least the Interweb is helping me.

What this article shows is ANZ has the lowest rate, the difference between 6.5 and 5.8 means you can borrow 10 percent more at ANZ. This could indicate why ANZ is putting breaks on investors with 60 percent LVR.

Why do we use the average 2 year rate across banks? Given that all the majors will match each other’s lowest rates (and sometimes go below - I got a rate in the 2.3x range recently) , surely it is best to use the lowest 2 year rate as proxy for the real cost of borrowing?

There is so much more to the loan application process than the test rate. Although ANZ have a lower test rate their servicing calculator is much tougher compared to say ASB or BNZ. This is due to the way that they calculate basic living costs. Not sure what the Westpac CEO is on... their test rate is definitely not 7.25%, it is much lower

So much is made about how much lending is going on but it should be more focused on who the lending is actually going to. Had the same issues with bank serviceability - combined income of 130+, easily able to save 2k+ a month, bank only approving 400k. Made me want to vomit.

With that saving rate I would have expected them to approve almost 450k. Perhaps your 2k per month does not factor in some annual expenses? (2k per month for 12 months is 20% higher than 2k per month for 10 months of the year when rates and insurance aren’t due)

you dont say if you are renting or own already - but the banks make the assumption that the costs of home ownership (maintenance, insurance and rates) will absorb some of your savings. The higher the value of the home the higher the cost of ownership is ie a Million dollar home is more expensive to insure (replacement value is higher) rates are higher and maintenance may also be higher than a $600K house.

Typically the banks calculate for first homes buyers lending based on Rent per month + savings per month - minus estimated costs of home ownership per month.

If you already own and are looking for a mortgage to upgrade then they will usually use savings per month - minus the estimated costs of home ownership per month based on the higher value home.

So when you plug $2000 into the mortgage calculator- it says the bank will lend $500K, but the bank may be assuming your new property will actually result in higher property maintenance fees of $400 per month and as such you will only be able to afford repayments of $1600 a month- hence they lend you $400K.

A lot of the value of a million dollar home could be the land, depending on where it is. eg A villa in Auckland in a top location may cost a few million dollars. But that exact same Villa in a small town in the south island may cost 300k. Yet it would still cost about the same amount to rebuild or maintain.

So much is made about how much lending is going on but it should be more focused on who the lending is actually going to. Had the same issues with bank serviceability - combined income of 130+, easily able to save 2k+ a month, bank only approving 400k. Made me want to vomit.

The biggest risk to bank collateral is probably if the government where to radically change the way land is allocated for development and/or the RMA. Freeing development would both devalue the existing housing and drive up wages (and therefore CPI/rates) which would be an extreme risk event.

Luckily there is about a 0% chance of that within this parliamentary term.

Here's a question I'd like banks to answer:

If they use a margin over current mortgage rates to estimate long term serviceability, why don't they do the same with the applicant's future income? If interest rates rise, it's because of higher inflation. Higher inflation also leads to wage increases. But of course banks choose to ignore that part of the equation.