Kiwibank last week cut its variable, or floating, mortgage rates by 100 basis points including home loans, business variable loans, business revolving credit, and business overdraft rates.
The move reduces Kiwibank's floating home loan rate to 3.40%, more than 100 basis points lower than the carded, or advertised, floating rates offered by ANZ, ASB, BNZ and Westpac. It also takes the floating rate nearer one and two-year fixed rates, which from some banks are as low as 2.55% and 2.65%, respectively. See all banks' advertised, or carded, home loan rates here.
Kiwibank's variable rate changes took effect for new customers on Monday, and will kick in for existing customers on June 29. Explaining the cut, Kiwibank CEO Steve Jurkovich told interest.co.nz the difference between floating and fixed rates had "felt uncomfortably large for a while."
So what of Kiwibank's big four rivals? So far none have followed by announcing cuts to their own floating rates, when often a major rate cut by one bank is followed quickly by similar moves from its rivals. Interest.co.nz thus put some questions to spokespeople for the big four. The questions and their answers are below.
Question 1) Does ANZ plan to reduce its carded, or advertised, variable lending rates in the short-term?
Answer: We’re constantly reviewing our home lending rates based on market conditions.
Question 2) If there's no plan to reduce them, will ANZ match the market if customers ask it to match lower rates offered by rivals?
Answer: As above.
Question 3) Does ANZ believe its current carded variable rates are justifiable and if so why?
Answer: We’re constantly reviewing our home lending rates. More than 85% of our home lending is on fixed rates and we currently offer one of the lowest home loan interest rates in the market with a competitive one-year fixed rate of 2.65%. Customers usually choose a variable loan as part of their loan structure for more flexibility to utilise and manage their lending than fixed rates offer. The interest rate differs as a result.
Question 4) Has ANZ been changing margins on business lending during the current tough economic conditions, and if so have these been increased or decreased and why?
Answer: We’re constantly reviewing our business lending rates and margins, taking into account market conditions and the current environment. We have not changed our risk based approach to margins for business lending through the Covid-19 pandemic and associated lockdown. We have, and continue to provide, a range of support measures for businesses impacted by Covid-19 and encourage customers to get in touch with ANZ to discuss their financial needs, and how ANZ can support them.
Westpac NZ understands Covid-19 has hit our customers hard, and we’ve been working to support them with competitive rates across the business. We’re constantly reviewing our pricing but have no changes to announce at this stage. We’ll continue to assess all lending applications on a case by case basis, depending on the borrower’s individual circumstances.
In March we passed on the full 0.75% OCR cut on all our variable housing rates. They make up one part of our suite of housing rates, which also includes a two-year special fixed rate of 2.69% and a three-year special rate of 2.79% which is the lowest among our main competitors. Currently 84% of our housing balances are fixed.
The rates we offer business lending customers are based on various factors including the cost of funds and the customer’s individual circumstances. We also passed the full 0.75% OCR cut to all our variable business lending rates. In most cases, wholesale rate changes have meant customer rates have reduced.
Question 1) Does ASB plan to reduce its carded, or advertised, variable lending rates in the short-term?
Answer: ASB continually reviews our rates to ensure we are able to support our customers with their financial progress, which includes helping them into home ownership. As part of this, you will see that we recently cut some of our fixed home loan rates, so we now offer one of ASB's lowest ever fixed interest rates of 2.69% for two years. We are finding this historically low fixed rate to be extremely popular with our customers and the vast majority of customers continue to place most of their mortgage onto fixed rates. Due to commercial sensitivity, we don’t comment on any future rate change decisions.
Question 2) If there's no plan to reduce them, will ASB match the market if customers ask it to match lower rates offered by rivals?
Answer: ASB focuses on pricing the overall lending relationship which can include fixed or floating, as well as any incentives the customer may be eligible for. We work closely with each customer to ensure the best and most affordable home loan structure is achieved to meet their individual needs for today and for the future. ASB is comfortable that our home loan customers receive good value from our competitive offers.
Question 3) Does ASB believe its current carded variable rates are justifiable and if so why?
Answer: See comment above. As always, ASB supports our customers with their home ownership goals and with mortgage rates being at historic lows, we are very comfortable that our home loan customers are getting good value from our highly competitive offers.
Question 4) Has ASB been changing margins on business lending during the current tough economic conditions, and if so have these been increased or decreased and why?
Answer: Overall business lending pricing remains in line with the prevailing market conditions. These generally follow what is happening with OCR and other market benchmarks. With the move of the OCR down 75 points on March 16, all business lending rates we reduced in line with that change. As part of ASB’s commitment to assisting business customers impacted by Covid, we also introduced a range of relief options which included heavily discounted rates for overdrafts and waiver of fees. In addition we have also participated in the Government Business Finance Guarantee scheme which also have heavily discounted rates for lending.
We’re always reviewing our rates and while we have no changes to announce at the moment, we have market leading 18 month fixed term rate and all our classic rates are sitting below 3%. The home loan market is very competitive and we urge anyone considering their home loan options to talk to BNZ.
Our home loan pricing is based on a variety of factors, such as the OCR, the cost of funding and capital, the risk, and so on. Fixed and floating rates are different products and their different pricing reflects the different make up of those inputs. New Zealanders overwhelmingly prefer the certainty that fixed rates bring them, with around 85% of borrowers on these rates.
On business lending, we have made a variety of changes to help support our customers through Covid-19 and the recovery. Outside of the BFS (which we priced at 2.50%), we reduced business overdraft rates by 1.30% at the beginning of the lockdown and we’ve made significant cuts to the underlying base business rate, passing the benefit on to our customers. Credit margins are applied on a case by case basis and reflect customers’ individual circumstances.
The age of QE and cheap funding
To combat the economic downturn caused by COVID-19 and to assist banks, the Reserve Bank has embarked on a quantitative easing programme of up to $60 billion and cut the Official Cash Rate to just 0.25%. In its Financial Stability Report last month the Reserve Bank said:
"During March, [bank] funding conditions in wholesale markets deteriorated. Credit spreads widened, substantially increasing the cost of banks’ access to wholesale funding. However, since February no New Zealand bank has needed to issue term funding in these markets, as the extension to the average term of their funding in recent years now allows banks to wait out the market turbulence, and only return to these markets when they have normalised."
"Banks’ stable funding positions have also been supported by strong net deposit inflows since the escalation of the crisis. This is mainly attributed to Government schemes such as the wage subsidy, but has also been supported by growth in household transaction and savings account balances," the Reserve Bank said.
Meanwhile in its annual Financial Institutions Performance Survey (FIPS) issued in February, KPMG said banks' funding costs had dropped to their lowest point in the 33-year history of the FIPS. That was to 2.59%, down 11 basis points year-on-year from the previous low recorded in a FIPS. It's the third consecutive year funding costs have dropped to a new low according to KPMG.
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