Gareth Vaughan argues it's time for banks to cut unjustifiably high floating mortgage rates

Gareth Vaughan argues it's time for banks to cut unjustifiably high floating mortgage rates

By Gareth Vaughan

Are current floating mortgage rates, to use a word suggested to me recently by a former bank executive, a rort?

Carded floating, or variable, rates across the banks range from 6.39% at ICBC NZ, to 6.84% at HSBC. At 6.59%, Westpac is lower than the other major banks with Kiwibank at 6.65%, ANZ and BNZ at 6.74%, and ASB at 6.75%.

Meanwhile, carded revolving credit home loan rates shown here range from 6.65% to 7.20%. And many advertised business borrowing rates are in double digits.

In stark contrast carded, or advertised, fixed-term home loan rates are much lower and have been driving home loan borrowers to fix (see chart below).

Advertised two-year rates below 5.40% are on offer, and longer term there's SBS Bank's 4.99% five-year rate, and even TSB Bank's 5.89% 10-year offer. See all banks' advertised, or carded, mortgage rates here.

At the time of writing the 90-day bank bill rate was at 3.64%. And in its annual Financial Institutions Performance Survey released last month, KPMG said the average bank funding cost in the year to September 30, 2014 was 3.67%.

So a floating mortgage rate of say 6.60%, crudely comes with a margin for the lender of around 300 basis points. Of course some customers, taking out both fixed and floating rate loans, will be getting discounts on advertised rates.

But with a yield curve that's quite flat, at the time of writing one to five-year swap rates are all lower than the 90 day bank bill rate, banks are able to match out funding for several years at around the 3.60% level. Yet fixers are getting much better deals than floaters at much lower margins for the banks.

Banks can certainly afford to give a bit away. figures show, at an annualised rate of 14% at December, bank shareholder returns at their highest level in six years, and annualised profit at almost $4.6 billion at a record high. Big bank net interest margins are also running hot. ASB's hit 2.52% in the December quarter, and the average across ANZ, ASB, BNZ, Kiwibank and Westpac, was 2.33%.

Although floating mortgages are, quite clearly, providing superior margins for the lenders, locking customers in via fixed-term deals provides the banks with certainty. But is this certainty worth significantly lower margins?

Or put another way, are borrowers with floating and revolving loans being over charged?

The chart below comes from KPMG's FIPS report

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When you think of the original intent of an offered floating or variable rate - the deal is/was: the borrower takes more risk, but has more chance of benefitting from a lower rate which reflects the movement of the wholesale/retail market. 
That is not happening anymore: the floating rates are quite 'fixed' or frozen at the moment as the banks are trying to get borrowers locked in at tempting rates on fixed then get them off the open market where they may switch banks. 
6.6% is a very high rate -  you can get a cheaper rate on a credit card. 
The closest thing to a lower float is the 6 month rate, then borrowers have a chance to renegotiate every 6 months while avoiding the high price of floating. 

Yes, "floating" is a misnomer these days. I realised last week I was still paying 7.24% floating rate!

unfortunately the banks are not competing on floating or 6 month rates. most other rates have some kind of deal or special that makes them cheaper than the 6 month rate. i guess it is to draw us onto the longer rates. having said that i'm still sitting on a slightly more expensive 6 month rate so that i can react quicker to rate changes, than i would if i was on the longer 1 year rate. My question is how much lower can they actually go and will the banks take them there?

But if you are in Auckland and one of many property speculators, it will be more beneficial to be on floating rate

YES , its ridiculous that floating rates are between 6-7% and fixed rates as low as 4,99%

To be fair , and somewhat simplistic , floating rate money is funded onshore by Banks and a factor of the OCR , while fixed mortgage money is term deposits from Asia invested  in local Banks  .
That said , money is money,  like any commodity , and the price differentials are hard to justify  

Someone has to make money! Commonwealth Bank, owner of ASB, its share price doubled in the last two years and will be again soon. 

Of course it's a rort.   Banks have no great risk because they can change the price if they want.  If their funding cost went up, it only takes a month or two to pass that charge onto the borrower.  No downside for banks and can therefore be much cheaper.
Well New Zealand, just another way to send our standard of living offshore.

If the Government had the will to control house price inflation in Auckland, then our interest rates could be much lower to the benefit of everyone.
Instead they are sitting on their backsides and leaving all the hard decisions to the Reserve Bank.
National do not want to offend their backers, both in NZ and overseas by putting in place measures that will stop this house buying frenzy by investors.
Banks are not the problem, this Government is the problem with their complete inaction on the demand side of property investment.

why would the banks reduce this very high floating rate?  If they did, borrowers will not have the attraction to fix.  Fixing helps banks to lock these fixers up and have them as their base clients while they look for more suckers in the markets.

The reason for higher floating rates is very simple.
With a fixed rate the banks only complete on the new business volume which is typcially about 5% of their book in any given month.  As such changes to fixed margins flow through to their P&L slowly.  Hence competition almost exclusively occurs on fixed rates where the immediate pain of margin contraction is far less.
Conversely when banks change their floating rates the whole book reprices.  If floating rates make up around 30% of the market then that is $60 billion.  A 0.25% move in the advertised rate would cost banks collectively about $150m in revenue.  Big numbers.  The marginal volume benefit of competing on a floating rate would never justify the cost so it simply doesn't happen.
The next point is that Floating is where the price insensitive money or lazy money tends to sit.  When fixed rates mature the client automatically goes on to the carded floating rate and sometimes can take months before they realise.  
This gives banks extra margin but they also risk churn so its a delicate balance between extra margin and losing business.

Spoken like a borrower. Borrowers and banks will eventually pay for the theft that is currently being suffered by depositors. Plunging valuations and shocking rate increases will be hard to fathom for a generation that grew up on the over financialisation of capitalism.

Tell me if its "theft" why do depositors leave their money on deposit?  they are free to move it anywhere they want are they not?  Why do depositors "deserve" a historically un-realistic return when the [world's] economy is doing so poorly  and it tettering on deflation and depression?
Plunging valuations and shocking rate increases would normally be considered opposites. ie if housing values are collapsing then interest rates will have falling as well.  So just why do you think such an un-usual event will occur? or even how? Now its qute possible that if interest rates climb significantly that the housing bubble gets popped by that, then of course interest rates will hit rock bottom fast as the RB panics.  Really then I dont fathom you reasoning at all.

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