10yr fixed rate home loan launched

TSB Bank's new longer-term fixed loan offer aims to entice borrowers looking for debt servicing certainty

5th Feb 15, 5:53pm by David Chaston

TSB Bank now offers mortgage payment certainty fixed for a full ten years

TSB Bank has launched New Zealand's first 10-year fixed-term home loan.

It is available to borrowers who have equity of at least 20%.

The launch interest rate for this 10 year loan is 5.89% pa. That is a level that is below many other bank's five-year fixed rates. Kiwibank has the lowest five-year fixed rate and this is also 5.89%.

That is more evidence of the new very flat yield curves at work.

"We’re delighted to offer New Zealand’s very first 10-year fixed home loan giving Kiwi families and property investors certainty to plan for the long-term with a competitive interest rate," said TSB Bank CEO Kevin Murphy.

Murphy told interest.co.nz TSB's research showed that many borrowers were looking for rate certainty over the long run, and he expected the low-rate/long-term combination would appeal to first home buyers who wanted to eliminate their interest rate risks when their budgets were tight.

This is a product that will be funded by the bank solely off of the New Zealand swap markets, given that the bank does not have retail investors with 10-year term deposits.

Break fees are a risk for borrowers with very long fixed mortgage contracts. TSB Bank's standard break fee policies will apply. We understand these to involve reimbursing the bank for the difference between the wholesale interest rate the bank committed to when it granted the loan and their wholesale costs when they repay early.

Another feature that will interest borrowers is the provision to transfer the loan to another home as the borrower makes life cycle changes. This will eliminate one important break-fee risk.

Murphy also confirmed that borrowers will be able to get some early period of the loan contract interest-only. (Interest-only terms will not be available for the whole or even most of the contract.)

Both the transferability and interest-only features will be attractive to residential property investors.

The loans are available today.

Not only does the 5.89% offer compare well with other five year rates, it compares very well with ten year fixed rates that are available in Australia. CBA offers these fixed loans at 7.59%, NAB's rate is 7.64% and Newcastle Permanent offers 6.69%.

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38 Comments

by skudiv | 5th Feb 15, 6:00pm 1423112425

You can get 30 years at 3.5% in the US

by speckles | 5th Feb 15, 7:40pm 1423118434

Good to see longer term rates coming through, they are highly integral to high cost markets such as Manhatten and London.. A lot of people fund international investment with 30 year fixed rates ex US in the high twos. We still have a long way to go be competitive.

by steven | 5th Feb 15, 8:20pm 1423120852

Agree, but that looks high for the next 10 years.

I wonder what the break fee will look like....

by Money Man | 6th Feb 15, 12:14pm 1423178081

Yeap and you either have to live there to get them or agree to your bank providing a a USD currency loan secured by your NZD assets and be exposured to FX risk (unless you hedge or have natural hedge like USD income stream).

by Simon | 5th Feb 15, 6:29pm 1423114169

Incredible rate. Will be looking into this. Asb follow suit or you might be losing a customer

by Chairman Moa | 5th Feb 15, 7:27pm 1423117649

Great stuff

PS. but god helps you if you need to break the term..

by MortgageBelt | 5th Feb 15, 7:44pm 1423118696

Do the Americans pay break fees on their 30 year etc fixed loans?

NZ mortgages may well be tracking lower than 5.89% for a few years.

by steven | 5th Feb 15, 8:21pm 1423120886

Only a few? interesting to watch I'll say.

by speckles | 5th Feb 15, 8:58pm 1423123121

If you negotiate hard here as well in the US... break fees should not be an issue as your negotiated rate is still below the prevaling rate so you have time to break on the trend down.

Westpac here allows this as an example.

by skudiv | 6th Feb 15, 11:39am 1423175974

No break fees for fixed mortgages in the US.

by TimfromTaupo | 5th Feb 15, 9:22pm 1423124561

2015 will be interesting

by Grant A | 6th Feb 15, 9:47am 1423169272

Oh just wait for the cries when the extent of the potential break fees are realised by some households. Breaking a 10 fixed mortgage has 5 times the cost than a 2yr one given the same percentage out of the money - that better be well explain by the banks when the borrower takes it out and later wants to change banks or move locations etc. However with rates towards the bottom of a long-term cycle that may well not be much of an issue for the next cycle and worth a portion in that time bucket.

Speckles - that depends upon what you consider "the prevailing rate". The prevailing rate that counts is the prevailing swap rate for the remaining period. If you take a 10yr fix when 10yr swaps are at 3.50% (and get say a 5.89% total rate) and then come to break after 2yrs and the 8yr swap is at 2.5%, your break fee will be face value x 1% X 8 i.e. $40,000 on a $500,000 discounted back to net present value. The US with its much more sophisicated financial markets is unique and can let you refinance at no cost as I understand it, because, again as I understand that as well, they have a dynamic hedging process on their fixed rate book that anticpate potential breaks/refinances and adjusts - someone else here may be more informed on that.

by speckles | 6th Feb 15, 9:59am 1423169985

Grant, the real point is that not all banks are equal on break rates calculations, that is the key element you need to understand with offers when going long, appears some are more flexible than others from experience. If you know what you are doing you will not get caught here and the US.

by Grant A | 6th Feb 15, 10:10am 1423170608

Speckes all banks have signed up to a standard break fee contract with the Commerce Commission to ensure that it is uniform and legally arguable because much of the general public don't understand break costs, in fact they usually refer to them incorrectly as break fees which they're not. But yes, if a bank wants your business it can waive them, pay another bank's cost, pay your solicitors fees, a give you a TV with it, its called marketing. But try to get them to waive a $40k break cost on an 8yr $500k mortgage, or try to get the new bank to pay it, it ain't going to be the same attitude as $2-3k type cost, that's my point.

by MortgageBelt | 6th Feb 15, 10:24am 1423171460

The reality is that Break Costs charged to borrowers are very punitive in NZ & Aus, and everyone in the industry knows that the banks do not actually incur all of the costs that are 'calculated' - banks can normally easily re-loan at similar rates, some at floating, some at various fixed. At the moment the banks are making lucrative profits and margins, more than enough for them to absorb some break cost for their long suffering patient customers - especially if that customer stays at the same bank.

A lot of borrowers got stung heavily after the GFC trying to come off 9 or 10% fixed rates, & yes will be wary of long term fixes.

by Grant A | 6th Feb 15, 10:56am 1423173408

God help the uninformed with no idea who comment on behalf of "everyone in the industry"

by spottie | 6th Feb 15, 11:20am 1423174828

"A lot of borrowers got stung heavily after the GFC trying to come off 9 or 10% fixed rates, & yes will be wary of long term fixes".

They didn't get stung at all.

They chose to terminate their contract and paid a fee for doing so.

They obviously felt it was still to their advantage to do so.

Grant A.

Loving your restrained postings.

I think the diplomatic corp would be an excellent career choice in the future. :)

by Money Man | 6th Feb 15, 12:11pm 1423177874

And I guess those pepole fixed at those rates (9% +) because the floating rate was over 10%. You cant have it all ways': pay the higher floating rate or fix with risk the at rates may go up or down during that period.

by speckles | 6th Feb 15, 10:29am 1423171791

Well you are correct on your comments however it is not the whole story, you must be a NZ banker, working in Bank PR perhaps:-)

The point is not all banks keep to it and evidenced in the current transaction I'm undertaking which will mean no business left with the NZ bank..so sure it is not being treated as marketing cost.

After the transaction is complete all worldwide investments finance via US funds....

by Grant A | 6th Feb 15, 11:05am 1423173925

Speckles - Yes I was (but PR?, dont start sounding like the other individual - I serious doubt any bank PR Dept would feel it could inform that type and wouldnt bother). In comparison with that totally uniformed individual here, I do know the area reasonably well and costs that a bank incurs when breaking that it can pass on - if they choose not to for some other reason, thats great for the borrower but they are absorbing a cost in doing so all the same in the rates scenario I outlined in the earlier post - its their call.

by glennav8r | 6th Feb 15, 11:16am 1423174566

This is not the first time a 10 year term has been available in NZ. In 1988 I got 10 years fixed at 14% with The National Bank. Floating rates at the time were 17% and had been higher. It cost a few thousand dollars in break fees to get out of that one.

by skudiv | 6th Feb 15, 11:47am 1423176445

I'm sure 14% seemed like a good deal then, even though today it sounds like credit card rates. I don't think there is much to fear from a rate rise these days.

by MortgageBelt | 6th Feb 15, 11:37am 1423175847

So where is the 'break bonus' paid to the borrower when they break a fixed rate term and move to a higher rate With the same bank?

Obviously, 'break fees' is a sensitive issue to the bank public relations appointees.

by Grant A | 6th Feb 15, 11:50am 1423176654

You finally ask the correct question MB, that is and has been my question of them as well - and then you go finish off with some mindless stuff, but I'm no longer surprised

by cowboy | 6th Feb 15, 2:31pm 1423186305

What would happen to the funds? They're choose to terminate an existing contract at their option - that gives surrender value.

Last break I did, the bank calculated interest owing vs new interest over same period and did credit some off costs without being asked.

by Chairman Moa | 6th Feb 15, 11:51am 1423176660

From memory (hope it hasn't failed me) in my previous mortgage document there was a formula for the break fee with few variables which you can request the bank to provide before sigining it.

Also, there are few break fee calculators on the web (mainly from Aust mortgage brokers). I used them before and it wasn't far off what BNZ charged me for my break fee.

by Money Man | 6th Feb 15, 12:07pm 1423177638

If you dont want to be exposed to any break rates, don't fix, just float.

Remember a fixed rate is a contract: you want to get out then there is lilely to be come form of compensation from other party.

Breaking fixed rates contracts always appears to be driven by client not the bank as bank has normally taken a fixed hedged position and is comfortable to see contract out: its the clients who wants to break it to bounce to a better deal thru the fixed rate period forgetting why they took the fixed rate at outset then complaining the bank is ripping them off.

Dont see banks wanting clients to break out of Term Deposits, another contract, when rates fall and they can pay client less.

by MortgageBelt | 6th Feb 15, 1:26pm 1423182411

There's a big premium now for staying on Floating atm 6.59 compared with 5.8 at 6 month fixed. So the price positioning is heavily weighted to encourage borrowers to fix.

And the Floating is not really 'floating' anymore - it appears to be fixed with a hard floor underneath, despite wholesale rates declining.

There are many legitimate reasons to break a fixed term other than rate chasing, such as a house sale, move country, desire to use investment or inheritance funds to repay chunks off your mortgage etc.

The new 'floating' strategy seems to be to fix for 6 to 12 months then drop to floating for a couple months while negotiating another 6 or 12 month rate below carded rate. This means that as rates drop and move around borrowers can scan and choose reasonably flexibly.

by spottie | 6th Feb 15, 12:21pm 1423178505

"Dont see banks wanting clients to break out of Term Deposits, another contract, when rates fall and they can pay client less."

Precisely Money Man.

I know someone who is still getting 6.75% and 7.0% on 2 TDs (for another 7 months anyway) as they took out five years TDs back in 2010.

by Grant A | 6th Feb 15, 1:27pm 1423182458

Agreed - both parties take a contract, the bank lays it's risk off effectively to an investor at that level of rate, and all parties are happy, Rates go down and the borrower wants to break then thry pay a very prescripted and documented break cost (sanctioned by Comcom) if current rates for the remaining period are lower,, Not very complicated and very prescripted, yet many show a total lack of understanding of it, Whilst its a reasonably standard global system with some variations (US totally different) I do have an issue as to why break profits are not paid out I,e where you fix low and it goes up by the time you want or have to break for whatever reason

by Grant A | 6th Feb 15, 5:36pm 1423197387

Ah but Spottie, surely your investor friend must be ripping off the bank? Well probably not, as the bank's passed that risk off into the market long ago. But then, that effectively means doesn't it that there's a borrower out there hedged high with a base rate at 6.75%-7.0% ....hang on, so doesn't that mean that the investor is ripping off the borrower ? Gee, far too complicated this stuff.

by MortgageBelt | 6th Feb 15, 2:14pm 1423185265

Banks were investigated by the Commerce Commission over the break fees charged in 2010 with many customer complaints.

http://www.comcom.govt.nz/the-commission/media-centre/media-releases/2010/mortgage-break-fees-investigation-by-commerce-commission-concluded

There are also some question marks over whether, in reality, each and every fixed rate loan is actually tied to an actual wholesale contract - or whether there are 'pools' of wholesale funding with averaging of the risk and funding cost. In which case the break cost calculation may not be accurate.

http://www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2012/2012jun75_2wong.pdf

How does a customer evaluate these risks with information asymmetry? If the funding supply chain was transparent to the retail borrower then it may be fairer.

by cowboy | 6th Feb 15, 2:29pm 1423186163

does not matter if it is tied to a specific wholesale contract. Whole point of pooling. the packet of money borrowed at X%, lend at Y%, margin = Z. If the bank restructures it's end that just good business and nothing to do with the client (unless client wants to pay for the bank to handle specific end-to-end paper security ... ie much!! more expensive)

by Grant A | 6th Feb 15, 3:17pm 1423189075

Hence the Comcom prescriptive break cost procedure needed as the average borrower has had little understanding that a bank hedges it's risk and stuffers a loss if rates fall when the borrower wants to break - looks like the understanding is even just as poor now

by bigblue | 6th Feb 15, 4:36pm 1423193799

Should be 10 years fixed at 4.95%

by Money Man | 6th Feb 15, 5:08pm 1423195734

Whats your rationale for that rate or just some rate plucked out of thin air?

by ngakonui gold | 7th Feb 15, 4:51pm 1423281097

Personally,if i was a whole lot younger,had a partner who was working i would be climbing into this.Head down and arse up for ten years paying the mortgage and saving as much as possible as well .

by Kevin | 8th Feb 15, 9:16am 1423340164

All good in theory Ngakonui gold but what was the average house price back then? Average mortgage in Auckland now $500K? Average incomes haven't gone up five times that's for sure. Makes all the 'we paid 20% 20 years ago arguments somewhat irrelevant'....and if house prices plummet I pity those on 10 year fixed rates...ouch in a number of ways!