Westpac first out the gate to lower mortgage test rates following OCR cut

Banking / news

Banks start trimming, or thinking about cutting, their mortgage serviceability rates, opening the door to higher borrowing capacity

[updated]

10th Oct 24, 9:02am by Ella Somers

Source: 123rf.com

Some of New Zealand’s biggest banks have either started to trim their mortgage test rates or are thinking about it following the Reserve Bank’s decision to slash the Official Cash Rate (OCR) on Wednesday.

Banks use mortgage serviceability rates to gauge the repayment capacity of would-be home loan borrowers’ so banks can be sure borrowers can meet repayment requirements if interest rates rise. A lower test rate increases borrowers' borrowing capacity.

After the Reserve Bank cut the OCR by 50 basis points to 4.75% on Wednesday, interest.co.nz asked the country’s biggest banks if they had plans to review or lower their mortgage serviceability test rates.

Westpac said it had chopped its home loan serviceability rate from 8.65% to 8.15% following the Reserve Bank’s announcement. That serviceability rate change will be effective from the 14th October.

Westpac NZ’s general product manager Sarah Hearn said reducing the bank’s test rate would “support New Zealanders looking to get on the housing ladder, while ensuring we continue to lend responsibly”.

Westpac had home lending exposure of $67.209 billion as of June 30.

An ANZ spokesperson told interest.co.nz that ANZ NZ’s affordability test rate was currently 8.5%.

“The rate is subject to change and based on New Zealand market conditions,” they said.

ANZ is the country’s biggest mortgage lender and had home lending exposure of $108.149 billion as of June 30.

A Kiwibank spokesperson said the bank’s current test rate was set at 8.5% and the bank was in the process of reviewing it following the Reserve Bank’s OCR decision.

Kiwibank had home loan exposure of $26.945 billion as of June 30.

BNZ told interest.co.nz on Thursday that BNZ's current mortgage serviceability test rate was 8.5%.

“We regularly evaluate this rate to ensure all lending is appropriate and delivering the right outcomes for our customers. An OCR change may lead to a reassessment of the test rate,” a spokesperson said.

ASB has yet to respond if there have been any changes to the bank's mortgage serviceability rates post OCR. Prior to Wednesday, ASB was testing at 8.7%.

BNZ had a home loan exposure of $59.588 billion as of June 30 while ASB – the second biggest mortgage lender in the country – had home loan exposure of $74.401 billion as of June 30.

Double whammy

The 0.5% decrease to the OCR on Wednesday was widely expected by the market even though the central bank had signalled it might only cut by 25 basis points.

The Reserve Bank’s Monetary Policy Committee said on Wednesday that economic activity in NZ was subdued and that was partly due to restrictive monetary policy.

“The New Zealand economy is now in a position of excess capacity, encouraging price- and wage-setting to adjust to a low-inflation economy. Lower import prices have assisted the disinflation,” they said.

The Committee assessed that annual consumer price inflation was within its 1% to 3% inflation target range and almost at its 2% midpoint. The Consumer Price Index (CPI) data for the September quarter is out next week.

The Committee also said that the current preference for shorter-term mortgage rates by borrowers would “increase the speed” of changes in the OCR influencing household cashflows over the coming months.

The latest Retail Banking Insights publication from the New Zealand Banking Association (NZBA) – the banking lobby group – found 39.7% of mortgage holders in NZ were ahead of minimum mortgage repayments.

That data is from the period of January and June of this year when mortgage rates hadn’t started to come down at pace.

As as of June 2024, there were 1.38 million home loans across 1.14 million customers. The average loan value was $318,151, while the average home loan value for first home buyers was $472,361.

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23 Comments

by bw | 10th Oct 24, 9:19am 1728505184

What are mortgage holders going to do with the extra $'s that don't get spent at the bank in loan repayments? Spend it at the shops? No. Their recent near-death experience will see them pay down their Debt instead. Everyone has now seen that, contrary to expert prognostications ( "Mortgage rates are going down when the OCR goes negative!") % rates can very quickly soar to unexpected levels and create pain for the indebted.

And what will those with savings in the bank do now that their return is less from interest receivable? Spend more at the shops? No - in fact, they'll reduce their spending accordingly.

So in the grand scheme of things, a lower OCR is going to mean less spending across the economy, not more. And the lower it goes, not only is that confirmation that 'things' are worse than we see, but spending will keep contracting at the shops.

by nzlegofan | 10th Oct 24, 9:51am 1728507084

This doesn't make any sense. Sure, there may not be a huge increase in spending given the recent 'near-death experience' as you put it, but there's no logical way that people will spend less with lower interest costs than they would with higher interest costs. Most people aren't going to spend every additional interest dollar saved on paying down the mortgage

by Chairman Moa | 10th Oct 24, 11:25am 1728512720

That's true. Most aren't that financial savvy, they will spend the additional money paying off credit card balances, and outstanding amounts they missed on their Harvey Norman interest free which about to expire!

by bdogg | 11th Oct 24, 7:13am 1728584015

He often makes no sense. Usually all he can think of is the potential of a war breaking out. I know from my pov I haven’t done anything fun for the last year or so with my family and the guilt is getting to me about not taking them on holiday (domestically).

I’ll be ripping some money into the economy when I can.

by kiwikidsnz | 10th Oct 24, 9:17pm 1728548222

"What are mortgage holders going to do with the extra $'s that don't get spent at the bank in loan repayments? " A smart person would see that maintaining the same payments with a 1%+ reduction in interest rates would knock years off a 25-30 year mortgage

"And what will those with savings in the bank do now that their return is less from interest receivable?" Look for a house to buy before prices escalate again

by Yvil | 10th Oct 24, 9:56pm 1728550573

"What are mortgage holders going to do with the extra $'s that don't get spent at the bank in loan repayments? Spend it at the shops? No"

YES, the majority will. I'm not saying it's the savvy thing to do, but we have to look at things neutrally my dear bw, and not through the lens of what we (you) would like to happen.

by JimboJones | 11th Oct 24, 12:47am 1728560838

Many of us have been paying well over the minimum mortgage repayment. So it wouldn’t be unreasonable to spend some of the interest rate decreases instead of paying the mortgage off even quicker (yawn)

by Blackbeard | 10th Oct 24, 9:17am 1728505067

Nice, quick, everyone get the largest possible mortgage you can, eliminating any spare cash to spend in the wider economy. If everyone does this, we can force the RBNZ's hand, they'll have to keep dropping rates to try to keep the lights on. We win!

by immigrant_ | 10th Oct 24, 11:09am 1728511762

That's also a bit non-sense.

For now, lower test rates are following lower interest rates on a 1:1 ratio. Increased lending capacity at lower interest rates generate equal or lower repayments for borrowers.

Practical example.

Say someone was trying to get $500k over 30 years 3 months ago, at 6.49%. They were tested at 8.65%

Monthly repayment: $3,157

Tested repayment: $3,897

'Surplus': $740

The lower test rate would allow them to get roughly $25k more. If we calculate the same metrics for a $525k loan over 30 years at 5.99% and 8.15% test rate:

Monthly repayment: $3,144 (lower than before)

Tested repayment: $3,907 (bit higher than before)

'Surplus': $763

In both scenarios customer is left with very similar surplus to either pay ahead or spend elsewhere. You gotta remember that although banks are obviously interested in lending more, they are also aware they need to be smart with their risk exposure and safeguarding against future shifts.

In westpac's case, interest rates would need go over 8.15% for that customer potentially becoming stressed - reminding they can also be risk-averse in other sections of customer's repayment capacity. That's where ANZ was a bit adventurous in 2021-22 when they pushed test rates too low and their customers felt the pain more than other banks when interest rates went up.

Anyway, banks lowering test rates won't be a sole factor in pushing rbnz to make decisions. Ultimately they're in the business of making money, but regulatory pressure made them smarter with provisioning and assessing repayment capabilities to decrease the risk of needing a bail out.

by safeashouses | 10th Oct 24, 10:03am 1728507791

Come on westpac you are tinkering - now ANZ knows how to cut a rate

by Iceman | 11th Oct 24, 5:57am 1728579451

Have some inside info that the 5.59 is temporary only…

by stjohn | 10th Oct 24, 10:20am 1728508809

Come on Kiwibank, drop 0.50% off your test rates too! I wanna borrow some more money

by morphyoss | 10th Oct 24, 2:17pm 1728523045

It's crazy isnt it. The only reason people are in trouble now is because the test rates were too low before.

The OCR at its height was only about moderate when compared historicly. Banks should never reduce the test rates on long term mortgages for the exact reason that it can always go back up.

Of course the problem isnt actually the test rates at all, it's the price of housing. Maybe we could actually do something to fix that instead. Then 9% test rates would not be so hard!

by DaveB1978 | 10th Oct 24, 2:33pm 1728524035

Or their income has been affected due to redundancy etc.

by DaveB1978 | 10th Oct 24, 7:39pm 1728542351

It costs stupid money to build a house. Until that is fixed, house prices will remain high. They may become cheaper for periods when people need to sell but the cost of building underpins the house prices.

by Sluggy | 13th Oct 24, 5:45pm 1728794747

That's absolute bollocks. New builds do not set the price of existing stock.

Add that to the immigration and housing shortage stories to pump the market.

by ChrisOfNoFame | 10th Oct 24, 9:03pm 1728547407

Let's take a step back and look at the bigger picture.

If stress test rates drop below 8.5% then the RBNZ must tighten Debt-to-Income Ratios (DTIs) to keep a lid on our ridiculous housing market.

Note that there are effectively two DTIs, one for owner occupiers, and one for residential property 'investors'. LVRs too. And at this time the 'investor' DTI and LVR should be tightened to keep FHBs in the market and prices stable.

Balls in your court RBNZ. Please do what's right for all Kiwis.

by HouseMouse | 10th Oct 24, 9:56pm 1728550570

To have to have any meaningful impact DTIs would need to be 4 or less

by Yvil | 10th Oct 24, 10:02pm 1728550972

"If stress test rates drop below 8.5% then the RBNZ must tighten Debt-to-Income Ratios (DTIs)"

Again, that's projecting what you think should happen, but it doesn't mean at all that they "must". The RB may tighten DTIs or they may not.

by the Joneses | 11th Oct 24, 10:12am 1728594775

Read the second part of the sentence. "they must....to keep a lid on our ridiculous housing market"

by HouseMouse | 10th Oct 24, 9:53pm 1728550438

Prices won’t start rising meaningfully until those test rates are less than 7%

by JimboJones | 11th Oct 24, 12:43am 1728560593

You should be able to bypass the stress rate by fixing long. For example if you can afford the 5yr rate now, the chances are you will be in a much better position in 5 years when your rates change.

by nktokyo | 11th Oct 24, 8:20am 1728588035

Good time to be a FHB. Prices low and rates on the way down, so your repayment costs should decrease over the next year and you can lock in 5 years at a nice low rate.