Competitive pressure in the face of languishing house sales is driving mortgage rates lower. Kiwibank's latest cut brings sub-4% rates to fixed terms of two years

Competitive pressure in the face of languishing house sales is driving mortgage rates lower. Kiwibank's latest cut brings sub-4% rates to fixed terms of two years

Kiwibank has cut its two year fixed home loan rate by -20 basis points to 3.99%.

This is the lowest rate of any home loan in the current mortgage market, and for the longest term.

Westpac has a 3.99% offer for a one year fixed term. That matches HSBC Premier, which also offers the 3.99% rate for an 18 month term. Now Kiwibank is offering that rate for a two year term.

Anecdotal market comment suggests that 3.99% is now matched by most banks for a one year term. The promotion of the same rate for a two year term by Kiwibank is likely to shift actual market pricing to this duration as well.

It may well draw a competitive response - just as this one is likely to have been motivated by the Westpac move down.

Borrowers under the Kiwibank offer require a minimum of 20% equity. But unlike Westpac (and others), Kiwibank does not require them to hold a transactional account with them or require that their salary is paid to a Kiwibank account.

The new rate is also available for customers utilising the Welcome Home Loan program. The rate becomes effective on Monday, January 28, 2019.

This latest mortgage rate cut comes even though it is not really supported by wholesale rate movements. In early November 2018 the two year swap rate was about 2.02%. This rose sharply to 2.20% soon after but slipped back to about 2.05% in mid December. On this slip-back, Kiwibank cut its two year rate from 2.29% to 2.19% in early January. Now the wholesale rate for two years is 1.92% (and near a record low) which represents a fall of -13 bps. Today's mortgage rate cut is a -20 bps reduction, on top of the -10 bps reduction a few weeks ago. It seems fair to observe that retail mortgage rates are falling faster than the wholesale swap rate.

And it also needs to be pointed out that term deposit offer rates are not reducing either. The lower home loan rates will be coming at the expense of net interest margins.

3.99% is not the record low two year rate. SBS Bank offered 3.95% in late October, early November 2018 for that term.

See all banks' carded, or advertised, home loan interest rates here.

Here is the full snapshot of the advertised fixed-term rates on offer from the key retail banks.

below 80% LVR 6 mths  1 yr  18 mth  2 yrs   3 yrs  4 yrs  5 yrs 
as at January 28, 2019 % % % % % % %
               
ANZ 4.99 4.05 4.19 4.29 4.49 5.55 5.69
ASB 4.95 4.05 4.19 4.29 4.49 4.95 5.09
4.99 4.10 4.79 4.29 4.49 5.19 5.39
Kiwibank 4.99 4.05   3.99 4.49 4.99 5.09
Westpac 4.99 3.99 4.09 4.29 4.59 5.29 5.49
               
4.10 4.10 4.29 4.35 4.49 4.99 5.19
HSBC 4.85 3.99 3.99 4.19 4.69 4.99 5.29
HSBC 4.99 4.15 4.49 4.29 4.49 4.99 5.09
4.85 4.05 4.19 4.25 4.49 4.95 4.99

In addition to the above table, BNZ has a fixed seven year rate of 5.95%. TSB no longer has a 10 year offer.

Fixed mortgage rates

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64 Comments

Perhaps indicating that mortgage rates generally are not going to come under upwards pressure over the next 2 years.

Not sure it indicates that at all. It possibly indicates a desire to grab market share, even if it makes a loss. KB have retail term deposits for 2 years at 3.55% ... can't run a bank on 0.44% gross margin. Still I guess they'll just ask mum and dad for money, you know, since apparently they're 'ours'

RBNZ proposed capital requirements will undoubtedly put upwards pressure on mortgage rates.

I doubt whether banks would offer 3.99% for 2 years if they were foreseeing significantly higher interest rates from the OCR, or Swap rates, or term deposits over the next 2 years.
In fact, recently some borrowers have broken some fixedterms, paid the break penalty, and refixed at lower rates.

They aren't forecasting interest rates in the future by offering one now. They lock it in and execute a funding contract based on wholesale rates ... which will do whatever they do in the next 2 years (it's this movement that drives 'break penalty', as they need to break out of the funding contract.

The fact is - they still only have a short gap between retail deposit and retail lending rate, which is clearly unsustainable.

You may wish to read up on RBNZ capital proposals. This will affect bank margins and will likely be recovered at least partially through pricing in order to attain a similar return to what they do now. Even RBNZ admit this will have upwards pressure in prices.

My understanding is it won’t dirextly impact Kiwibank as they already used the standardised model. It will only change funding costs for the big for Australian banks

While the change in the risk weighting won't impact them (it it will be standardised), there is still increased capital requirements proposed and a change in what is acceptable, which will hit all banks.

If their competitors are forced to increase their rates I can't imagine KiwiBank staying significantly below them.

Hi MisterB.

Using an assumption that the banks lend from deposits I could see how you would arrive at that conclusion about Gross margin. But it's simply not the case. Deposits are created when a loan is written. You may find this link useful.

https://www.youtube.com/watch?v=oSobNFYdtzM

You may wish to read the RBNZ rules around lending to deposit ratios and avail yourself of the GDS for each bank.

While it may be true that a matching deposit is created in the market when credit is created, that deposit is not necessarily with the bank that issued the credit (it goes to the vendor) and once it is on the market, the banks still compete to attract the deposit.

There are a bunch of regulatory requirements on maintaining their balance sheets.

Your notion implies a financial institution can merely lend and never take deposits. Wouldn't you think everyone would just do that then?

How can Auckland & Tauranga rank above San Francisco which has obscene property prices ?
Note where Auckland & Tauranga rank in affordability
Some perspective compared to other cities with Ponzi housing markets
https://www.huffingtonpost.ca/2019/01/23/least-affordable-cities_a_23650...

.

"unlike Westpac (and others), Kiwibank does not require them to hold a transactional account with them"

Kiwibank needs to be mindful that it could end up with a book of subprime/delinquent stuff. I'm sure it's taken that into account with this policy, but losing track of the income side of a customers balance sheet can prove costly. ( eg: Job loss and failure to report 'change of circumstance' to the lender. Too late when the regular scheduled payments cease)

If first home buyers stop buying, that’s when the market falls over, but at these unaffordable bubble prices, lower and lower rates to keep them buying is an unsustainable situation.

First Home Buyers arguably just replace Last Home Buyers in some degree, who die off and sell their stock to the new entrants at the start of the process. Everyone talks about the demand at the beginning, but who noticed the supply coming on at the end? Not many, and more of it is coming to market as every day of an aging society passes. At some stage, there could be more supply of deceased estates than there is demand from FHBers. After all, the Last Home Buyers can own more than one 'home' from a lifetime of accumulation whereas the Newbees only need one to start with.

The difference is that those last home buyers bought in at historically normal income to price ratio, probably about 3. Current FHBs are currently buying in at 9 times national income.

Correct, average house prices nationally are now 10 - 11 x the average WAGE instead of 3 - 4 x in the late 70's. People often quote "House Price to Household Income" stats which are distorted, the average household income today is made up of 2 average wages, instead of 1. A much larger deposit must also be saved with a much lower interest return on savings. Sources below.

https://www.oneroof.co.nz/news/boomers-v-millennials-which-generation-ha...
https://nzhistory.govt.nz/culture/the-1970s/overview

1978 - Average House Price = $29,698, 20% deposit = $5940 or 7 months wage
1978 - Average Household Income = $8204 per year (oneroof link above, table halfway down the page)
1979 - Average Wage $157 per week ($8164 per year nzhistory link above)

2018 - Average House Price = $525,000, 20% deposit = $105,000 or over 2 years wage.
2018 - Average Wage/Salary $50,000 per year (stuff link below)
2018 - Average Household Income = $105,000 per year (stats.govt)

https://www.stuff.co.nz/business/industries/97237664/chart-new-zealand-a...
https://www.stats.govt.nz/information-releases/household-income-and-hous...

NZDan, can you add the interest rates back in 1978 to get a full picture:

1978 interest rate …?
2018 Interest rate 4.2%

Probably should include the pace of wage inflation in that case. Remind me, did wages go up faster in 1978 or 2018?

Do you think a 16% rise in wages from 1978 to 1979 would have helped or hindered those with a mortgage?

1978 Interest Rate = 12% (11.xx but rounded up to 12%) -> https://teara.govt.nz/en/graph/23100/interest-rates-1966-2008

From the house prices in my previous comment:

1978 = $58 per week over 25 years @ 80% LVR @ 12%. = 36% of average wage ($157 per week)
2018 = $522 per week over 25 years @ 80% LVR @ 4.2% = 54% of average wage ($50k or $960 per week)

But nobody is complaining about mortgage serviceability, it's the deposit requirement!!!! How hard is that to understand?

Thanks NZ Dan : )

I believe the last time income to price ratio was at 3 interest rates were 18% just saying...

Good point.

But you would have been more correct to say that the Price to Income Ratio (PIR) was almost always at 3x PIR up until the late 1980'a ie irrespective over time of what the interest rate was.

It was only after that, by legislation and council ideology, that the house price (ie the land) became decoupled from the income.

And there are many places in the world that have maintained 3-4x income pricing even as rates have fallen to all-time lows - Houston, Atlanta, Chicago, Germany etc etc

Why do you think it's an "unsustainable situation"?

Yvil, because as I said it’s a bubble. Bubbles are not sustainable by definition. Those FHBs last in, paying bubble prices, with mortgages at those prices will be left with negative equity as the market falls. See Sydney and Melbourne right now, with the FHBs who bought in the past couple of years.

Unfortunately many owner occupiers in Auckland who have bought in the last 2-3 years using maximum allowable leverage by the banks are potential collateral damage.

You have first home buyers and also those upgraders - sold their property to upgrade to a larger house, a house in a better neighbourhood, etc.

You know VoR, Real Estate is not really made of soap and water, it's more land and building, bubble is only a metaphor. So if we accept that, you're saying it's not sustainable because prices are too high?

Yes, of course, prices are way too high compared to incomes (second in the world now I think). The prices are unsustainable, and the market is unsustainable at these levels. We can debate how the market will correct, but property markets never have soft landings from these levels. They tend to remain flat or drop suddenly. It’s so high it’s very unlikely to remain flat.

Except that's not true; there are many countries with higher price to income ratios. Take a look here to get an idea: https://www.numbeo.com/property-investment/rankings_by_country.jsp

Wow that's an interesting table showing price to income in other countries !!

Might want to look at how they calculate price to income ratio before referring to that site...

Price to Income Ratio is the basic measure for apartment purchase affordability (lower is better). It is generally calculated as the ratio of median apartment prices to median familial disposable income, expressed as years of income (although variations are used also elsewhere). Our formula assumes and uses:
net disposable family income, as defined as 1.5 * the average net salary (50% is assumed percentage of women in the workforce)
median apartment size is 90 square meters
price per square meter (the formula uses) is the average price of square meter in the city center and outside of the city center

1) apartments, not houses/all residential property
2) assumed household income, not actual data
3) uses price per square meter, so very different for places with high density housing.

Frankly, its got so many fudge factors and assumptions you may as well pull numbers out of your butt.

Might want to look at how they calculate price to income ratio before referring to that site...

That's a modern-day problem of easy access to information on the internet.

Except that's not true; there are many countries with higher price to income ratios. Take a look here to get an idea: https://www.numbeo.com/property-investment/rankings_by_country.jsp

When you look at Numbeo indexes, you should really understand the data sets of what you're looking at. For ex, even on price-to-income ratios, Japan is ranked higher than NZ. Do you think that this is really a reflection of reality? Or do you think the Japan property bubble has further to fall?

It is true.

The Numero index uses a different formula methodology than the Demographia survey.

To Quote them

'Note that there is no standard formula to calculate property price indices. Our formulas differs from Case-Shiller Index, UK Housing Price Index, etc.

Price to Income Ratio is the basic measure for apartment purchase affordability (lower is better). It is generally calculated as the ratio of median apartment prices to median familial disposable income, expressed as years of income (although variations are used also elsewhere). Our formula assumes and uses:

net disposable family income, as defined as 1.5 * the average net salary (50% is assumed percentage of women in the workforce)
median apartment size is 90 square meters
price per square meter (the formula uses) is the average price of square meter in the city center and outside of the city center.'

The Demographia survey is the one used by the World Bank and most other institutions - except interest.co.nz.

Agreed that the numbeo data is not fully accurate and is based on apartment prices. The point I was making though is that the oft quoted "NZ most expensive" or "NZ second most expensive" housing market should really have a disclaimer: "amongst OECD countries" and even then there are clearly some individual cities that have higher price to income ratios.

FYI, I got 4.0% from ANZ earlier this moth for 1 year fixed, interest only. (I thought it was not worth fighting over 0.01% but you can most likely get 3.99%)

Nice. Just out of curiosity and I can understand you may not want to divulge, but this 1 year fix you've just secured at Interest Only:

Is it a re-fix of an existing mortgage?
If so, was the previous term Interest Only as well?
What happens to your cash flow when the Interest Only terms are up? I thought IO mortgages were normally a maximum of 5 years with P & I being paid on the remaining 20 years. Or does your bank extend you indefinite Interest Only terms because you're a valued client?

NZDan

Note that different loan products have different terms and conditions.

Loan products for business customer / commercial customers have very different terms and conditions compared to loan products used in consumer residential lending such as a traditional consumer mortgage. Some of the professional property investors with larger property portfolios are treated as property businesses and borrow on business or commercial loan terms. There are different pressure points for these borrowers with these loan products.

He did previously indicate that he has a loan product which needs renewing every year. As you know, traditional consumer mortgages does not require renewing every year.

Consumers have also taken advantage of a loan product with an offset facility - not exactly sure of the terms & conditions of these facilities, how often they are required to be renewed, and what the covenants are (if any)

Hi NZDan,
- It's a re-fix
- Previous term was also IO
- There is no time when interest only term comes "up". I've heard before someone post in the past about 5 years of IO, this is definitely false, maybe it applies to Aus, definitely not in NZ.
Look, the bank is in no hurry for me to pay back the loan, they're happy for me to pay interest forever. Because the loan is for investment, I'm also very happy to pay the bank interest forever at 2.68% (4.00% - 33% tax deduction). It is a different story if it's for your own home, then knock that mortgage on the head as soon as you can

Cheers for that! I just was a bit confused because according to ANZ:

Interest only repayments

The principal (the amount you borrow) must be repaid at the end of the loan term. Interest only terms are generally available up to two years for the purchase of an owner occupied property, and up to five years for the purchase of a residential investment property

https://www.anz.co.nz/personal/home-loans-mortgages/manage-existing-mort...

I guess that's at their discretion though as it does say "generally", like you said if the money is rolling in then what's the issue?

It's an issue for the borrower if they assume it can keep being rolled over. In a year, ANZ may well (within their rights) say no, if the 5 years is up.

The 5 years have been up a long time ago

Wrong Yvil. Westpac and their main rivals were flat out signing up interest only 30 year mortgages in 2014. (five yearly interest only renewals) Times now up for many. With the backdrop of ring fencing and sliding values, at the banks discretion, they can ask that the principle needs repayment.

https://www.junoinvesting.co.nz/property/2018/7/19/do-you-have-an-intere...

“The investors who are paying principal and interest are comfortably cash-flow rich – they can have a decent lifestyle and chip away at their principal.”

The question remains, are the remaining investors a risk to the financial system? Probably yes.

42 per cent of rental property lending is on an interest-only basis and 8% of investors owe 40% of the debt.

https://www.stuff.co.nz/business/money/104323467/reserve-bank-says-8-per...

Wow RP, you know my banking deals better than I and my bank do, you're truly full of it.

Yvil: "I have just baked a pecan pie"
RP "You're wrong, you have not, here is the link why you have not, I have read lots about it"

Folks, listen to people who do things, not to retired people who read, criticise and do nothing themselves

I think RP is trying to wish a little bit of misfortune on to you.

"These greedy little whippersnappers with their Interest Only mortgages making a profit at the expense of my Term Deposit rates, by golly they'll get their comeuppance just you wait. They don't call me Retired "Schadenfreude" Poppy down at the bowling club for nothing."

He's probably got a severe case of Whistle Tooth going on as well.

Yvil, now-now, settle down :) I've done plenty. What irks you greatly is I that I possess the discipline to pause and observe whereas you've become addicted by way of an apparent greed. Each to their own but I of course I do hold those in high regard who (dont) present themselves as a contributing hazard to the financial system. Reading your posts since being a member, I highly doubt you're one of those. I wish no one miss fortune other than knowing miss fortune presence itself to the unskilled and uninsightful regardless! We are just one global shock away from knowing who really has meat on their bones.

The Spruikers are certainly thinning in numbers of late.

Haha, very funny NZDan

Yvil, Nzdan, all good, really - I get it :) Its sleep depriving knowing others receive interest income whilst you pay it. Capital gains means everything to you. The only problem is your timing......

Nothing wrong with the timing on our purchase. Capital gains on our property are only a measure of opportunity cost. We have saved 10’s of thousands of dollars in extra mortgage borrowings by buying when we did. Then you factor market rent if we had held off on our purchase, which is much higher than our combined mortgage/rates/insurance payments.

Which is not true of the average FHB in Auckland at these inflated prices. market rent is most certainly lower that interest, rates and insurance on a mortgage. Especially so on a like for like basis

Nzdan, in depth analysis has revealed its cheaper to rent right now revealing your views as being somewhat uninformed. An abundance of opportunities awaits those who watch this debt fueled unravel. As you witness this, I'm guessing you'll wish you had waited and patiently saved (a form of buyers remorse)

Interest, insurance, rates and preventative maintenance are dead money too. Your precious capital gains are also unbanked and can be taken from you tomorrow whereas you still have your relatively enormous debt.

https://www.interest.co.nz/property/rent-or-buy

18 months of home ownership and our (as you put it) relatively enormous debt is $160k. Combined mortgage/rates/insurance are < $300 per week for a 3 bedroom house on a touch under 1/4 acre. Even if mortgage rates hit 10% our mortgage payments will be under $350 per week. I think we're going to be absolutely fine.

Nzdan, and the total amount you will pay over the lifetime of the loan is...

Anyway, we can bash on at this for hours. You feel successful as much as I am liberated and that's what matters at the end of the day.

Assuming I stick with payments over 25 years and interest rates remain the same - $300k.

When I break my 2 year fix and double my payment amounts - $200k over 8 years.

If I take my current Mortgage/Rates/Insurance amount per week, apply a 2% p.a. inflation rate, over 25 years I'd have paid $500k in rent.

But hey, I'm not in Auckland so it's apples and oranges.

The biggest difference between renting and owning is that after 25 - 30 years (maybe less) you own a freehold house in one case and … you own nothing at all by renting

Yvil, as spoken by the undisciplined spender. Those that live within their means would do better renting for some time to come with the view to owning a home.

The mounting evidence is very much in favour that it's now wiser to receive than to give others dead money (interest).

Rubbish. Not in New Zealand.
Financially literate people may do better in the short term renting, but definitely not in the long term.

agreed. One should always aim to own one's own home over the longer term. Buying at the top of a cycle is a game for fools.

Anyway, barring a financial shock, house prices could easily underperform inflation for ten more years! Renting while this is happening is the way forward for the self disciplined and patient.

NZDan

The other point to note is that even if a consumer mortgage product is being used, a borrower who is able to meet the debt serviceability tests is able to renew on an interest only basis. In order for a property investor to meet current debt serviceablity tests for a consumer mortgage loan product, the LVR is probably 50% or below.

Yvil, when you've figured out that by speculating on big gains and forking out interest (rent) to ANZ, is yesterday's game, hopefully you'll discover a new addiction. That feeling of being liberated ;-)

It offers a great sense of accomplishment. Trust me, I know.

The following article describes Westpacs 30-year "interest only" mortgages as irresponsable. in 2014, a quarter of their portfolio was interest only, slightly less for the other major banks. It also describes the risk of interest only junkies being rendered under water when the market falls.

https://www.stuff.co.nz/business/money/63014826/null

From the 2014 article "Applying those figures across the industry suggests New Zealanders are treading water on about $40 to $50 billion worth of mortgage debt"

If anything, today with property peaking and vulnerable to big falls, the "treading water" situation is now probable much worse. Specufolks, it's time to pay your P & I!

Today, speculators such as yourself still have access to others money. It's best described as a movement of helpless addicts repeatedly rolling a lopsided dice.

Interesting that this article points out SBS had 3.95% for 2 years in October, but didn't mention the much more relevant offer from BNZ on November of 3.99% for 2 years.

I broke all of my existing lending with BNZ, the highest was at 4.59%, and refixed it all at that rate. Will save $12,000 on interest over those 2 years, after accounting for the break fees I had to pay.

"Kiwibank cut its two year rate from 2.29% to 2.19% in early January."

No they didn't.

they are following GDP.

Hi, for anyone interested, I have just broken all existing lending with ANZ (4 separate loans, due to roll off in between 3-6 months time; break fee $395) and refixed for 2 years @ 3.99%. Deal was done via a broker, initial offer was 4.05% for 2Y - broker pushed back and they then matched Kiwibank at 3.99%.

Lending is slightly over $500k, owner/occupied property, value $900-950k in Auckland.

Hopefully helps anyone in a similar situation considering whether or not to break in order to try and secure these lower rates.