New Zealand home loan borrowers are now getting fixed rates at bigger discounts to Aussies even as rates fall everywhere. They are falling faster here than across the ditch

New Zealand home loan borrowers are now getting fixed rates at bigger discounts to Aussies even as rates fall everywhere. They are falling faster here than across the ditch

Westpac is offering a two year fixed rate for just "2.29%". ANZ's equivalent offer is the same.

These are Aussie offers.

So why are Kiwi's offered 2.79% or 2.95% for the same fixed rate mortgage and told these are 'record low rates"?

Actually, in terms of cost to the borrower, the New Zealand offer is better.

The problem is that the mortgage markets in each country are quite different. The New Zealand market is 80%+ based on fixed rate contracts. The Australian mortgage market is similarly dominated by floating rate arrangements.

But it is more complicated than that. Our mortgage contracts are relatively simple affairs; you borrow over the term at a specified interest rate.

However in Australia, the stated interest rate is just the start. There are bundle and package fees, and related 'discounts', to complicate matters. Their regulators require banks to publish a Comparison Rate to expose the true costs involved. And 80% of all Aussie home loans are wrapped up around these opaque bundle arrangements.

We have been tracking a New Zealand - vs - Australia mortgage comparison for more than five years now, publishing the shifting penalty that Kiwi home owners pay compared to Australians. We last did that a year ago.

And now it is no longer a 'penalty' - Kiwis are getting lower home loan rates.

And this comes at a time that the Aussies are figuring out that fixed deals are a better deal, even after their opaque fee load is taken into account

And for the first time in our memory, pricing for New Zealand borrowers has shifted to our advantage. Home loans are cheaper in New Zealand than Australia.

Here is the current comparison in the way we have done it consistently since 2015:

Residential mortgage interest rates
May 31, 2020, <80% LVR Floating 1 year 2 years 3 years 4 years 5 years
New Zealand % % % % % %
   ANZ 4.44 2.79 2.95 3.35 4.45 4.55
   ASB 4.45 2.85 2.69 3.35 3.45 3.55
   BNZ 4.55 2.79 2.69 2.99 2.99 2.99
   HSBC 4.49 2.60 2.65 2.80 2.89 2.99
   Kiwibank 4.40 2.65 2.79 3.25 3.45 3.55
   Westpac 4.59 2.79 2.69 2.79 2.99 2.99
NZ average 4.49 2.75 2.74 3.09 3.37 3.44
   Swap rates 0.26* 0.25 0.23 0.25 0.29 0.35
   margin to swap 4.23 2.50 2.51 2.84 3.08 3.09
             
Australia            
   ANZ ** 4.49 4.16 4.02 3.09 3.90 3.82
   CBA (ASB's parent) ** 4.27 4.13 3.99 3.87 3.98 3.93
   NAB (BNZ's parent) ** 3.45 4.18 4.04 3.91 3.95 3.87
   HSBC 3.26 3.21 3.16 3.12 3.13 3.18
   Suncorp 3.26   3.16 3.17   3.20
   Westpac ** 3.04 3.61 3.53 3.45 3.54 3.51
AU average 3.63 3.86 3.65 3.43 3.70 3.59
   Swap rates/BBSW 0.14* 0.17 0.21 0.26 0.35 0.44
   margin to swap 3.49 3.69 3.44 3.17 3.35 3.15
   * 90 day bank bill rate
   ** these are discount package rates that come with big annual fees
differential (NZ-AU) 0.86 -1.11 -0.91 -0.34 -0.33 -0.15
  differential in May-19 0.39 -0.14 0.00 0.07 0.09 0.30
  differential in Nov-18 0.67 -0.12 0.21 0.35 0.79 1.05
  differential in Nov-17 0.89 0.55 0.64 0.90 1.33 1.39
  differential in Jan-17 0.28 0.13 0.59 0.86 0.89 0.94
  differential in Aug-15 0.69 0.26 0.16 0.56 0.78 0.83
  differential in Feb-15 1.02 1.06 0.92 1.00 1.01 1.11

The benefits here are substantial - averaging about 1% for fixed one and two year rate contracts.

Interestingly, the penalty Kiwis pay for floating rate deals got worse in the past year compared to the Aussie options. But that is a penalty which applies to less than 20% of homeowners, probably a lot less if you exclude the SME lending that is done within the bank's mortgage books.

The real commercial reason home loan pricing hasn't fallen in Australia and New Zealand is that the Aussie operations are cost-heavy. Taking ANZ as an example, they report a group NIM (net interest margin) of just 1.7% whereas the New Zealand ANZ operations were still achieving 2.1% in the same period to March 2020. So despite charging higher effective rates to customers of the largest component of their loan book (mortgages), the Aussie bank ended up with a smaller NIM.

Wholesale money is needed to balance the duration matching requirements.

May 31, 2020 Floating 1 year 2 years 3 years 4 years 5 years
  % % % % % %
NZ margin to swap +4.23 +2.50 +2.51 +2.84 +3.08 +3.09
AU margin to swap +3.49 +3.69 +3.44 +3.17 +3.35 +3.15
             
and this compares with the levels in May 2019 as follows ...        
NZ margin to swap +4.08 +2.39 +2.47 +2.54 +2.90 +2.94
AU margin to swap +3.94 +2.78 +2.75 +2.75 +2.99 +2.82
             
and compares with the levels in November 2018 ...        
NZ margin to swap +3.86 +1.93 +2.04 +2.20 +2.71 +2.69
AU margin to swap +3.19 +2.05 +1.83 +1.85 +1.92 +1.63
             
and compares with the levels in November 2017 ...
NZ margin to swap +3.93 +2.51 +2.42 +2.59 +3.14 +3.08
AU margin to swap +3.28 +2.21 +2.08 +2.03 +2.05 +1.98

Here too we see tighter margins to swap in New Zealand for fixed rates, and tighter in Australia for floating.

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9 Comments

I am not sure how you have calculated those rates. I have properties in Australia with mortgages from ANZ. They are no hidden costs that I have experienced. Their rates to me were 2.19% for 1,2 and 3 years. Your calculation is seriously confusing

looks confusing when the fixed rate AU is higher than the floating.

We didn't calculate anything. We took the 'Comparison Rate' data from each bank's website. 

my mistake,I thought comparison was with other banks not the true cost.so the packaged loans must have considerable add-ons if the comparison rate is so wide.looks like they charge 300-400 dollars annual fee and there has to be others.

I think you'll find as well as the fee, they calculate the comparison rate on a piddly small mortgage balance so the fee becomes way more significant.

"Comparison rate is calculated on a $150,000 secured loan, over a 25-year term."

Lower rates than Aus - could it be that they expect higher rates of default here?

Yep, I told ANZ there was zero chance I would be able to repay any loan and they offered me $1m at 1.5% for 100 years.

Two countries, two swaps curves, two different capital requirement regimes, two different economies. Why compare ?