Kiwibank leads in cutting mortgage test rate following last week's OCR cut, increasing borrowing power

Kiwibank was one of the first banks to trim its mortgage serviceability test rate in response to the Reserve Bank cutting the Official Cash Rate (OCR) last week, quickly followed by New Zealand's largest mortgage lender ANZ.

ASB and Westpac told interest.co.nz on Wednesday that they had also cut their servicing test rates.

Banks use mortgage serviceability rates to gauge the repayment capacity of would-be home loan borrowers. 

This is so banks can be sure borrowers can meet repayment requirements if interest rates rise.  A lower test rate increases borrowers' borrowing capacity. 

Kiwibank confirmed on Monday it had cut its mortgage test rate following last week's 50 basis points OCR cut to 3.75%.

“Our test rate prior to the OCR change last week was 7.5% and, effective today, it has been reduced to 7%,” a spokeswoman said.

Kiwibank had home loan exposure of $27.5 billion as of September 2024.

ANZ NZ, the country’s biggest mortgage lender, said on Monday that its affordability test rate was 7.6% but as of Tuesday its affordability test rate had been cut to 7.25%. 

ANZ had home lending exposure of $108.7 billion as of September 2024.

ASB told interest.co.nz on Wednesday its servicing test rate for home loans had decreased from 7.6% to 7.3% as of Monday.

“ASB considers a variety of factors when assessing customers’ ability to service a home loan, including a servicing test rate. We regularly review our settings to market conditions to ensure they remain appropriate,” an ASB spokesperson said.

ASB had home lending exposure of $75.4 billion as of September 2024 and is the second biggest mortgage lender in NZ.

Westpac, which has home lending exposure of $67.4 billion as of September 2024, also told interest.co.nz on Wednesday that it had reduced its serviceability rate to 7.25%.

BNZ said its test rate is currently sitting at 7.5% and has not changed since the OCR decision last week.

BNZ had home lending exposure of $60.1 billion as of September 2024.

The Co-operative Bank told interest.co.nz its test rate had been adjusted on Monday but declined to share what the bank had changed it to. 

The Co-operative Bank had home lending exposure of $3 billion as of September 2024.

TSB and SBS have yet to respond to interest.co.nz’s queries about their test rates.

The Reserve Bank's February Monetary Policy Statement released last week showed it's forecasting the OCR will likely be near 3% by the end of 2025, around 50 basis points lower than the central bank forecast in its last review of 2024. 

Governor Adrian Orr commented last week that 25 basis point cuts were likely at the next two monetary policy committee meetings if the economy evolved as forecast. But he also said that a final cut to a 3% OCR in late 2025 was less certain.

‘Quite significant’

Key Mortgages’ Jeremy Andrews said the lower test rates banks were now using will make a big difference to borrowers who had experienced much higher test rates in early 2024 and late 2023.

For example, ANZ NZ's test rate reached over 9.1% in 2023, which Andrews said was the highest test rate that he’d seen in his nine-year career. ANZ NZ’s test rate had been as low as 5.8% in the 2020-2021 period. 

Andrews said most of NZ’s banks now had their test rates closer to to the 7% mark but the banks were moving their test rates at different times which might depend on their appetite for business and risk. 

He said depending on the bank, there had been around a 1.5% to 2% reduction in test rates over the past year which he described as “quite significant”.

“So instead of having to be able to afford to service a 9% mortgage, including the banks contingency buffer, now you're getting down closer to 7% affordability and that makes a massive difference.  Especially if you're someone who's got a lot of borrowing or investment property loans, because your proportion of your income going into your mortgage is so much greater.”

Andrews said that the new debt-to-income (DTI) mortgage restrictions which came into effect in July 2024 (which limit the amount of debt that borrowers can take on relative to their income) had initially had little impact because high test rates out of banks last year had kept borrowers from reaching their borrowing limits.

“Whereas now it's getting to the point where we're seeing actually more of people's borrowing hitting debt to income ratio limits,” Andrews told interest.co.nz.

This means that even if mortgage test rates continue to fall, banks will still have restrictions on how many borrowers can exceed DTI ratios. The DTI cap for owner-occupied properties is six times their income and seven times their income for those with an investment property.

“So if you have an owner occupied property and you're kind of pushing the boundaries on how much you can borrow, funnily enough, having an investment property in the mix, your borrowing actually increases quite a bit, if debt to income ratio is a limiting factor,” Andrews said.