Mortgage specials testing the limits of what is commercially sustainable; banks on back foot

Mortgage specials testing the limits of what is commercially sustainable; banks on back foot

With eight banks, including the five biggest, all with mortgage specials active in the market, it is a great time to be a home loan borrower.

But the good times may not be sustainable for many banks.

Rates are falling, and the non-rate offers are getting substantial for borrowers who commit.

The latest RBNZ data shows the rise in the overall mortgage market is about $900 million per month, but other RBNZ data shows that more than $5 billion in "new housing loans" are being approved monthly.

Four times the value of new loans is being aggressively 'shopped'.

Borrowers are having no hesitation switching banks, showing little apparent loyalty, and being enticed by the range of incentives on offer.

All current specials require a minimum loan of at least $100,000, but there the commonality ends.

Here are the current home loan specials:

  Special Advertised Minimum Other conditions Incentives
    rate % equity %    
ANZ 1 year 4.95 20% Hold an ANZ Freedom account and an ANZ credit card. Fees may apply. $1,000 cash, Fee free banking with the ANZ Freedom account, Free ANZ Visa debit card, a credit card with no account fee for one year
ASB 1 year 4.95 20% Salary, wages, business income credited into an ASB account, and an ASB credit card. Fees may apply. Free Sony Bravia 42" LED TV, plus $1,000 cash
Westpac 1 year 4.94 20% Salary, wages, business income credited into a Westpac account, and a Westpac credit card or insurance product. Fees may apply.  
Kiwibank 1 years 4.89     [never had application fees] [free refinancing package]
TSB 1 year 4.88     An iPad or iPhone, plus up to $1,000 in legal fees
SBS/HBS 1 year 4.95     $1,000 toward costs of new lending or topups, no application fees. Free income protection insurance for the first 6 months.
HSBC Premier 1 year   4.99   Minimum of combined loan of $500,000 or more, or at least $100,000 in savings / investments with HSBC  
Co-op Bank 1 year 4.94     up to $1,000 in legal fees and set up costs

Mortgages have become a commodity. Banks don't like this lack of loyalty and are adding conditions to try and tie clients in closer - requiring them to hold their main transaction accounts and the [very profitable] credit card relationships with their mortgage provider.

Banks will also be looking for the opportunity to have you switch your insurance business, and even your KiwiSaver balances to them as part of their attempts to bolster margin loss in any discounted mortgage they offer.

But the need for more loan business is strong. Margins are under rising pressure.

Although it is a somewhat superficial measure, we compared the special mortgage rates above with the equivalent term deposit rates from the same institutions. The average carded special mortgage rate is 4.99% at present, while the equivalent carded TD rate averages 4.13%, suggesting a margin of only 86 bps.

In fact, it will be worse for banks than that.

Not only are discounts from advertised rates negotiable at present (we have heard anecdotes that 25bps is 'easy' to get), the value of the incentives is large in comparison with the interest amounts paid over a one or two year period, especially for loans of less than $250,000. They can be equivalent to up to 40 bps in one of those one year specials.  When you have a total of 86 bps available, giving away 25 plus 40 bps in a deal (which we have actually witnessed in some dramatic negotiations) is not sustainable, you would think.

Rates are almost at their all-time low (Westpac had the lowest modern-era rate in February 2013) and they may yet go lower. Wholesale money costs are low and fairly stable, although risk margins are declining for offshore sourced funds.

Savers should worry about these trends - declines in TD rates are an obvious option for banks to restore margin.

But the housing market is rising and there is a risk the RBNZ or the Government will move to dampen it with either rate rises or 'macro-prudential tools'. The good times may not last.

If you are in the market, negotiate seriously now with at least two of the main banks, and lock in your savings.

What is being offered in the market at this time are 'limited time offers'. They can't last for one group - savers or borrowers.

(Updated with Co-op Bank entry into table.)

See all advertised bank home loan interest rates here.

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"Rates are falling".  Really?  Your own data shows that rates have been this low before.  Rates are bouncing along - perhaps at the bottom - I don't know, who really does.
Swap rates were up quite significantly yesterday off the back of good US economic news, which will hurt banks with these specials and low margins - particularly the Kiwibank 2 year rate.
If swap rates hold up where they are, I expect these 'low' home loan rates to be gone within a few weeks.

Agree if swaps keep rising it will hurt those banks "buying" market share.
Some of the deals are only for a limited time only and I'm sure the banks will have a new loan dollar figure in mind as to when the pull the pin and revert to normal pricing.
 

Not sure why Westpac would want you having an ASB credit card. [aghhh! our error. Sorry Westpac. fixed now. Ed]
 
I got a text from Westpac yesterday asking me if I was close to making an offer, after they pre-approved my mortgage a month or two ago. Is this Gen Y marketing in full swing?

It seems to me that the 1 year rates are the sucker rates.  They get you on-board with a low rate now and in about 6 - 9 months time the RBNZ raises rates and by the time you come off your 4.99% in a year your only options will be 6% plus floating or fixed. 
 
I think I'll fix for three years then sell the house, Auckland's market will almost have peaked by then. 

I don't see it going up to 6% next year or for a while. Looking at the numbers at what house cost and whats been borrowed I can't see how some will be able to pay there mortgages at an  interest of 6% but if it moved to 7% then we will see a new wave of mortgagee sales. House prices will drop but at the expense of Mum and Dad home owners.

Maybe you could show us where the OCR has risen 1%+ per 1/2 year with zero inflation?
The last CPI I saw was 0.9% and it and the OCR looks pretty flat for 2 years out.
Ive run the numbers in my own spreadsheet for the last 5 years and Ive saved thousands by staying floating.  Last time I did that I figured that worst case a slow and likely rise of 1 to 1.5% per year would mean 6.5% OCR before Id start to lose money in year 4.
Now I like 1 year rates because if some huge very short term event happens the rate is locked in giving you time to get ready for its effects... 
Really though consider the OCR is on hold and that is only(?) because of the sillyness in Auckland. Ergo without that effect and with a 0.9% inflation rate below the target I think we could say our RB would be dropping the OCR and not raising it.
select your poison...
;]
 
regards
 
 

Steve - yes anyone who has floated has done well, but think ahead. We have hugely negative real interest rates in the world, rates artificially suppressed unnaturally below the rate of inflation  in the major countries of the world by money printing and every technique possible to hold the beach ball below the waves. Goodness know when they lose control but it won't be until monetary velocity and then inflation picks up, but then look out - it pays to remember, that when it goes, even in NZ we've seen long term fixed rates in 2009 spike nearly 1% in one day - miss that 1% in the 5 years a day late, and you would have had to funded at a rate close to minus 2% in the 12 months before that have broken even.