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:

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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