Majority of Kiwibank's mortgages now on floating rather than fixed-term rates

By Gareth Vaughan

Kiwibank is the latest of the major banks to reveal its mortgage customers' growing preference for floating loans over fixed-term home loans with over half the state owned bank's mortgage book by value now on floating loans.

Kiwibank's December quarter General Disclosure Statement (GDS) shows the value of its variable, or floating, rate mortgages almost doubled in the year to December 31, 2010 to NZ$5.5 billion from NZ$2.8 billion a year earlier. Over the same period the value of the bank's fixed-term mortgages dropped by NZ$487.4 million to NZ$4.6 billion. That's a rise to almost 54% of mortgages by value on floating rates from 35% a year earlier.

In the latest results round both ANZ and ASB have also noted significant customers moves towards floating mortgages. ANZ said 49% of its NZ$53.9 billion mortgage portfolio was on variable mortgages as of December 31, nearly double the 26% at the end of 2009 and 37% at September 30 last year. And ASB said about half its NZ$37.5 billion worth of home loans are now floating. That's an increase from just 25% within 24 months.

The latest Reserve Bank data shows as of December NZ$89.6 billion worth of total industry wide mortgages were on fixed terms and NZ$77 billion worth were floating. That means 53.8% was fixed and 46.2% floating, both the highest percentage and highest dollar amount floating since the central bank's records began in June 1998.

The customer shift to floating from fixed rate mortgages is helping push up margins at the banks. ANZ Group CEO Mike Smith said ANZ New Zealand's margins rose 7 basis points in the December quarter and ASB's net interest margin rose 0.4% to 2% at December 31 from 1.6% at December 31, 2009.

And despite posting a 41% drop in half-year net profit last week, Kiwibank said its net-interest-income rose to NZ$89.3 million from NZ$66.3 million, or from 1.19% to 1.42% of total assets with the rise largely driven by higher margins from floating mortgages.

Banks do better out of floating mortgages because the margin between the variable rate and short end of the yield curve, such as three month bank bills, is higher than the margin between the swap rate and fixed rate mortgages.

UBS banking analysts predicted late last year that New Zealand’s Australian owned banks will be an important profit driver for their Aussie parents in 2011 for the first time in a decade. The Sydney-based analysts noted New Zealand banks were writing more than 80% of new mortgages at variable rates.

“Variable rate mortgage spreads are 30-40 basis points higher than fixed rate spreads,” the analysts said.

“This mix change supports margin expansion in New Zealand.”

See Bernard Hickey's call for banks to 'donate' some of that margin expansion back to customers in an economy in crisis through rate cuts.

See all bank mortgage rates here.

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