David Chaston suggests that if you want to know where mortgage rates are headed next, watch what the big banks do with term deposit rates rather than where swap rates go

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The next mortgage rate change has been announced, this time from SBS Bank.

But it is not a sub-4% rate. Rather it is a -10 bps reduction to 4.05% for a one year fixed term.

That matches ANZ, ASB, Kiwibank and TSB. Only Westpac and HSBC Premier have a sub-4% rate for one year on offer at present.

However, 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.

The new SBS Bank rate became effective on Saturday, February 2, 2019.

How far mortgage rates can fall from here is an interesting question.

Certainly, wholesale swap rates have been declining although the recent shift lower has tended to be for durations of four years and longer. One year swap rates fell three weeks ago to be about -10 bps lower than they were in early December.

But banks are essentially funded from customer deposits. For challenger banks, these retail deposit rate are an essential limit on what they can offer. Only the four large Aussie banks have any significant wholesale funding. And even the Aussie-owned banks have less than 15% of their funding from wholesale sources. And they use this wholesale funding to manage their maturity mismatch. Retail depositors rarely commit to more than a one year term, but of course mortgages are 25 or even 30 year commitments by the bank. Replicating portfolio attributes cover a lot, but the mismatch still needs management - and bank customers expect that. It would be completely unacceptable for a bank to fail because of poor maturity matching.

The total of all deposits at banks (S40) reached a record high of $347 bln as at December 2018. Of that, households had $25 bln in transaction account accounts, $52 bln in savings account balances and $100 bln in term deposits. That means households held $177 bln or 51% of all bank deposits. Eighty-six percent of all household deposits pay interest. Household cash balances are up +6.2% in a year, faster than the overall growth rate of home loan lending. Term deposit balances are up +8.5% from a year ago.

There is no sign yet that banks are ready to cut those deposit rates, so the chance of lower mortgage rates is not high at present. But if deposit balances continue to grow strongly and lending growth waivers and can't keep up, that may change the calculus of senior banking managers.

The health of the home loan market in 2019 will be a core determinant of if banks can chop term deposit interest rates further and so therefore cut fixed mortgage rates. TD rate moves by the four big banks (especially ANZ), are what to watch.

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 February 2, 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 4.05 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.

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Is there any potential pressure on banks to relax interest rates if house prices declined considerably thus putting recent higher leveraged borrowers underwater on their mortgages? And so putting the bank asset (the property) at risk.

The number of borrowers 'underwater' would only ever be tiny if house prices fell -20% or more. Firstly, most mortgages require 20% equity and house prices haven't fallen anything like that. Secondly, banks all apply a 7.5% interest rate test to a new borrower's ability to pay higher rates from their income, even though they don't charge that. They make sure borrower income streams are resilient.

It seems that only an absolute maximum 4% of all mortgages could ever be under threat of being 'underwater'. These are those that were issued over 80% LVR in the past two years. And banks are likely to be very little exposed - they either require LMI (Lenders Mortgage Insurance) on those, or they self-insure LMI (and so specically provide for this risk). In the event, it would be less than 1% that might slip 'underwater'.

Why would banks arbitarily lower interest rates for every customer to protect a risk on a tiny fraction of them? Doesn't make sense.

Hi David.
I believe that DTI's are the key to mortgage stress rather than equity levels and with 25% of new lending last year above 6 x household incomes, that's akin to Northern Rock lending and causes stress very quickly in a lower GDP environment. Also none of us have a clue about how much of the debt in the market was raised abroad and arrived as 'cash buyers' in our fabled Auckland market.
Also with Sydney's median now at $830,000 according to (Corelogic December) the temptation of their housing crash could very quickly disappear some of our buyers that are capable of raising a mortgage in NZ.
Will we have government?regulator comments on the Royal Commission next week? Will we see it in the mainstream press? I think we're at a very interesting point for our banking sector.
Thanks for all your work


DTIs are just an academic metric. The real metric is serviceablity. DTIs are about as useful as median multiples, that is, pretty useless for predicting stress. Serviceability (payments to incomes) matter most. The only time they become an issue is if you think interest rates will rise substantially. But as most banks apply a 7.5% seviceability test, there is still plenty of headroom when actual interest rates are ~4%.

"Northern Rock" is a foreign country example from over a decade ago. Back then, NZ 2yr mortgage rates were 9.5%. In that case, yes, DTI was no doubt something to worry about. But it's a far away example, quite divorced from New Zealand realities. Besides I suspect our regulators are of far higher calibre than the asleep ones in the UK. Further, Northern Rock was chaired by an academic toff who had no idea what he was doing. Those sorts of governance collapses are very far from the New Zealand situation.

As for 'debt raised abroad' and invested in New Zealand as 'cash buyers' - I would impressed if there was anything like that. Certainly those overseas lenders won't have New Zealand assets as security. An unlikely material risk to NZ financial stability.

The Sydney issues are a lot to do with the crazy apartment building boom by developers. Yes, I think there will be a serious correction there. Westpac is the bank most exposed. But the types of properties most hurt are unlike most in New Zealand.

But I do think we are for a five year flat-lining of local property prices. We have seen this sort of market turn before, in fact twice in the past 20 years. Inflation-adjusted prices fall, but nominal prices generally hold. Most bears misunderstand the tolerance and ability of potential sellers to just wait it out. There isn't much evidence that things will be any different this time. I wouldn't apply UK lessons to NZ - that will give you a false lead.

As for guessing what's in the Hayne Report. Little point - it will be out in a few days. No matter what it says, there will be some impact on New Zealand, mainly for compensation (commission confict-of-interest) matters, and mainly for non-bank players. So long as the RBNZ is successful in pressing banks to hold more loss-absorbing capital (and they are ahead of Aussie in this) I think we will be fine. Yes credit will be tight while that extra capital is absorbed, but the adjustment will flow though in a subdued market, without crisis.

Thanks for your response. it's stress at the margin however that sets prices in a housing correction but most importantly reduced credit availability. As for Australian building,yes it's been high but there has been plenty of shonky building around New Zealand too.


"banks all apply a 7.5% interest rate test to a new borrower's ability to pay higher rates from their income"

Just confirming - is this for owner occupiers as well as non owner occupiers such as property investors?

The bank asset is the loan; the property is the security for that asset - splitting hairs, I know, but the last thing that banks want is their assets to be turned into 'property'.
That, to some degree, answers David' question above, "Why would they arbitrarity...?" Because they don't want to have to convert loans into property; neither do they want forced sales increasing, that might further damage the value of their security ( much lower property prices from negative feedback spiral). Much better to lower the price of loans across the board than risk contagion.
Lenders are continually Stress Testing their loan books, and they will know better than anyone what the trade-off between a possible increase in non-performing loans and lower interest rates is.

Thanks for the insights DC & BW.
I guess it’s a finely tuned balance.
If rates were lowered for alleviation of existing borrowers or to increase slowing sales, then banks have the risk of new ‘potentially risky’ borrowers again due to the new lower rates.

Interesting that recently some borrowers have elected to break their fixed term, pay the break fee, and refix cheaper.

Really? Evidence? Borrowers break fixed rate mortgages all the time. We have no evidence this is happening any more now than usual.

We do have a proxy for this - the times our break fee calculator is used. Usage since December 2018 has been entirely normal. There was a spike in November, but it has died down now. Our calculator was launched in October 2017, so this data only goes back to then.

There were some commenters on here recently discussing their recent breaks. Just a few not an epidemic.
Can the Interest search function be forced to return results chronologically?

When the banks brought out that 3.99% rate late last year there was quite a rush of people breaking their fixed mortgages and in many cases the banks were waiving the break fees. I thought it was odd at the time.

I wonder how many borrowers would be under water if house prices sank 25% ? What lies just around the corner from where we look can be what catches us out.
In multivariable complex systems it's very difficult to manage all the risks.

Here's the problem with that postulation. Ignoring (for the moment) mortgages for investors (the business of being a landlord), there are a bit more than $182.4 bln owed on mortgages on housing (RBNZ C22).

Those same owner-occupied houses are worth north of $812.9 bln. OK, lets say about half of them have no mortgage at all. So about $400 bln worth of houses are encumbered by mortgages worth $182 bln. That's an LVR of 45%. Lets be even more conservative and say a third of those have an LVR of under 25%. That leaves $270 bln carrying mortgages of at most $150 bln, or an LVR of 55%. 

Overall, even a -25% house price drop wouldn't affect many of these remaining ones in a way that would put them underwater. Sure, it would put more than currently under, but the proportion won't be large.

There are 1.75 mln private dwellings in New Zealand of which 1.1 mln are owner-occupied. If half have no mortgage, and only two thirds of the rest have an average of a 55% LVR, that means about 400,000 are exposed. Probably no more than 50,000 owner-occupied houses might be stressed (mostly Auckland, Wellington), and those that could face severe stress could perhaps number 5,000? Maybe 10,000. So that is a rounding error of the total houses - you would be lucky to get to 5% is a 'crisis' when house prices fell -25%, as you postulate.

And who really cares about landlord stress? If they had to sell up, that will just make those houses easier for other investors to buy or the tenants to afford to own. Their marklet will clear. The houses involved will still be there, probably occupied by the same people.

But David! On average there’s less occupants in an owner occupied home than a rental! There will be an enslaught of mass homelessness if the Landlords sell up!!!

Hi David

'Those same owner-occupied houses are worth north of $812.9 bln' That is assuming a continuation of the current 'easy' credit environment, which is less exuberant than it was 12 months ago and where greater emphasis is now being placed on household expenses. I spoke to an agent last weekend who had 3 deals fall through in December because financing conditions weren't met.

Libor has been rising, along with the Fed funds rate, albeit that has paused for now, but the real risks are being priced into the system and while mortgage rates have lowered recently, the margin compression that the Aussie banks are feeling over the ditch, may well effect things here moving forward with a need to pass on higher wholesale funding costs. And let's not forget the Royal Commission and it's effect on sentiment towards the household sector and the impact it will have on the worlds view of our Australian banking masters.

"When news broke that hedge fund manager paid £95m for a London mansion, it made headlines.... It was not the amount the founder of Citadel paid for the home...but the price he did not pay. Remodelled by (a) property developer (it) had an initial asking price of £145m and had languished on the market for two years priced at £125m."


So who knows what that $812.9 bln is really worth!

Could the next generation simply refuse to get into debt?.