Bank mortgage margins fall

Property

Margins between banks' carded fixed-term mortgage rates and swap rates drop to five-year low

9th Dec 13, 4:04pm by David Chaston

Margins on home loans are falling for banks. <a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

For the first time since November 2008, more than five years ago, the margin between average bank carded, or advertised, fixed-term mortgage rates and the equivalent swap rate has fallen below 2%.

Competition between banks for home buyers with a deposit of at least 20% is heating up, with the Reserve Bank restrictions on bank high loan-to-value ratio (LVR) residential mortgage lending in place, and driving bank margins lower across the curve.

This is especially true for the one and two year fixed mortgage rates.

However, margins are not falling for floating rates - and these margins are significantly higher than for the fixed rate home loans. And despite recent falls in fixed rate margins, they are still substantially higher across the board than they were between 2004 and 2008. This was the period when the previous housing boom was underway.

Interest rates themselves, however, are much lower today. The current one year fixed specials are below 5% whereas in 2008 they touched 10%.

The Reserve Bank has signalled the Official Cash Rate is likely to rise in 2014. Wholesale money markets have bid up swap rates recently, with one year swaps moving from 2.91% at the beginning of October to 3.23% today (Friday), a rise of 32 basis points over this 60 day period.

The level of housing credit is also substantially higher at the end of 2013, having reached a record $186.6 billion at the end of October. The lower bank margins are therefore on substantially larger credit bases.

Housing credit growth rates peaked in 2004 at 17% per annum, a far cry from today's 6%.

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15 Comments

by KH | 9th Dec 13, 4:42pm 1386560538

Is that banker photo a distressed Grant A ?

by Grant A | 9th Dec 13, 7:08pm 1386569306

Haha nice one KH - not one these days but in my day there were days like that.

by Boatman | 9th Dec 13, 6:36pm 1386567405

So , given the sources of funding are the same for both fixed and floating mortages , why have floating rates not fallen?

by Stephen Hulme | 9th Dec 13, 7:07pm 1386569271

Greedy beggars.

US banks lament current low interest rate levels:

......the Fed’s low-interest-rate policy has been a mixed blessing for banks. Along with lowering their borrowing costs, it’s limited what they can charge on loans and earn on other investments. The difference between the two—the net interest margin—has been declining since 2010. Brian Moynihan, chief executive officer of Bank of America, told analysts on a July 16 conference call that the “sustained low-rate environment” was hitting revenue and earnings. That’s why bankers and bank stock investors have a simple wish for 2014: higher interest rates. Read more

by Grant A | 9th Dec 13, 7:16pm 1386569801

Stephen - to answer your question the other day, looks like your typically 3yr euro borrowings swapped back into floating Kiwi currently prices about 90-100 bps over BKBM - so a touch under 4% if all were borrowed in the 3yr. Bearing in mind the funds that the bank were forced to lock into back in 2008-2012 at double that (and one bank I understand near triple that), 120-150bps funding cost abovve BKBM is about right. So somewhere in the low 4%'s but hopefully falling at least until rate hikes come. By my estimation NZ bank mortgage margins are probably curerntly somewhere in the 100-120bps range.

by Stephen Hulme | 9th Dec 13, 11:22pm 1386584525

Thank you Grant A.

by MortgageBelt | 9th Dec 13, 7:30pm 1386570654

Hard to believe we were paying 10% on a 1 year fixed in 2008.

That's why we then got suckered into fixing for 5 years at 8.4%! Ouch

Then we got stung with $12,000 Break fees (so called) . Harsh.

Then we got stung with fat healthy floating margins on floating. 5.7% floating in this global environs? Overcharging!

Ha ha, they are laughing all the way to the bank. Oh that's right they're there already.

Whatever the environment - the banks get the inside wholesale information, while the man on the street gets manipulated into choosing so called "low risk" options and pays premium.

Perhaps we need a 30 year fixed like the Americans & put it to rest for good. Now, I'm sure they dont get stung for 25 years of "break fees" should they repay early?

by Grant A | 9th Dec 13, 8:31pm 1386574267

MB - ok I'll bite - which aspect has you thinking banks did you over when in fact its clearly the market situation that did that to you and pretty much the rest of us,. Break fees ? (Comcom controls that calclation to ensure it fairly covers the cost to break and its certainly not a fee), you fixing at a high level and gifting the investor on the other side a high rate for a period ? (you weren't to know and it is the investors that gains), or "high floating rate (read the post above - what is a fair margin in your book? none I guess)

by MortgageBelt | 9th Dec 13, 8:43pm 1386574995

Floating should be in the low 5's carded.

Well, that was a realistic but hypothetical journey...!!

GA - how do break fees on USA longterm 30 year fixes calc? NZ/Aus formula would be a killer?

by MikeM | 10th Dec 13, 8:26am 1386617175

It looks like NZ banks make loads of money and if it is looked at strictly in dollar terms then perhaps they do in a relative sense. But using the true metrics being ROE/ROA, they would score a Good on the performance scale and certainly not an Excellent. I think ROE clusters around the 14-15% mark and ROA hovers somewhere around the .9 - 1.0% for the big 5 (please correct me if I'm wrong).

by Grant A | 10th Dec 13, 12:02pm 1386630141

MikeM - youre a first, someone who actually places a few facts around bank profits rather than using the emotive stuff soem doi here. Most understand it but there are a few on here who do not realise that profits should be equate to capital/equity employed i.e. your ROE/ROA calculation that confirms banks are average to good performancers but nowhere near the high end of NZ companies making really high returns on equity/capital - you just don't see posters complaining about the likes of Restuarant Brands, Hallensteins, Michael Hill, Mainfreight etc making 20-25% plus returns over the past 5yrs compared with the banks 10-15%. Personally if someone can make high returns out of me buying burgers in a market with a store on every corner, good luck to them as it has the added advantage that the stores will/should be good quality

by David Chaston | 10th Dec 13, 12:48pm 1386632909

Detailed return data here, by bank.

by Boatman | 10th Dec 13, 10:21am 1386624093

I dont understand why there is such a difference between Fixed and foating rates, given my understanding that the cost of Capital for the Banks , when averaged, is much the same for each Bank.

Floating rates can be adjusted more quickly , so one would think the Banks would incentivise people to pick floats rather than fix .

Either way , banks are ripping floating - rate customers off by charging anything between 1,5 and 2% more for the floating rate

by Grant A | 10th Dec 13, 11:37am 1386628636

Boatman - you may be misunderstanding how banks set fixed rates. Floating rates are based on a margin over bank bill rates (2.65%), fixed rates a margin over swap rates. The RBNZ sets the OCR and therefore indirectly the bank bill rate, whereas the market solely sets the swap rates. Swap rates are effectively a market forecast of the implied future bank bill rate which is forecast to go to 5% within the next 3yrs...5.5% within 4yrs.

And they're now well higher. The 5yr swap was just below 3% back over a year ago (the time to have acted I suspect) and is now above 4.5%. Add the bank funding cost, and whatever bank credit margin onto that which competitor pressures dictate, and there's your fixed rate of near 7% compared to floating near 5.5%. Short answer, the market dictates the bulk of that difference.

by Boatman | 11th Dec 13, 10:18am 1386710322

@Grant A , thanks for that , I did not click onto the difference between the two calcualtions and how they influence the interest rate charged .

It makes a little more sense now.