Analysis: Capitalisation of break fees may have driven up mortgage lending figures

Mortgage lending by banks jumped a surprising NZ$527 million in January, suggesting lower interest rates and a pickup in demand for cheaper housing may have been firing up the housing market again. But a closer look at the figures shows at least some of this big increase may be driven by the capitalisation of break fees by mortgage borrowers desperate to get new lower fixed or variable mortgage rates. Figures from RBNZ statistics (SSR Part E) show the number of variable rate mortgages jumped 31,638 in January alone to 434,706, while the number of fixed rate mortgages fell 27,965 to 910,542. The total owed on variable rate mortgages rose NZ$5.228 billion to NZ$32.298 billion, while the total owed on fixed rate mortgages fell by NZ$4.447 billion to NZ$121.196 billion. Bankers have told us that much of the activity in January was focused around borrowers switching to floating or short fixed mortgages from longer and more expensive fixed rate mortgages. Some report that as many as half of those breaking out of fixed rate mortgages were capitalising their break fees. A back-of-the-envelope measure shows that if half of the reduction in the number of fixed rate mortgages involved the capitalisation of NZ$20,000 worth of break fees into a variable rate mortgage, that would have increased mortgage lending by NZ$280 million. Total mortgage lending in December increased NZ$159 million and total mortgage lending has increased NZ$1.05 billion since the end of September when the breaking of fixed rate mortgages began in earnest. Over that time the number of fixed rate mortgages has fallen 61,306 while the number of floating rate mortgages has risen 82,831. Again assuming that half of the switching from fixed to floating involved the capitalising of a NZ$20,000 break fee, that would have increased the mortgage book by NZ$613 billion or more than half of the lending growth over that period. * This article was first published on Monday in our daily subscription newsletter for the banking and finance industries. The email costs NZ$365 per annum and carries exclusive news and analysis for New Zealand banking and finance industry executives, regulators and investors. Sign up for a free trial here.