Rate cutting by banks continued Saturday morning with both ASB and Westpac reducing selected interest rates, and Monday morning BNZ cut a key mortgage rate.
TSB followed up on Monday afternoon with a cut in its 1 year rate to 5.20% from 5.70%. This rate is below ANZ, National and Westpac on 5.25%, and ASB has also joined the party now, cutting its one, two and three year fixed rates even further below ASB on 5.7%. Kiwibank kicked off the latest round of rate cuts on April 26 with its 1 year special rate of 4.99%. Kiwibank said last week it had already dragged in NZ$100 million worth of business.
The moves follow a slide lower in wholesale interest rates on weak economic data and the worsening of the Euro crisis.
Home loan rates
Westpac has followed ANZ-National and cut its one year fixed mortgage rate to 5.25%. This rate is the lowest unrestricted home loan rate for the one year fixed term by any bank, although Kiwibank does have a 4.99% 'Special' for borrowers who have 30% equity in their property.
On Monday morning, BNZ cut its 18 month 'Classic' home lona rate to 5.10% from 5.89%.
Because swap rates have fallen sharply across the board, most banks will be responding to rate pressure from customers and competitors with a new flexibility on fixed-term mortgage rates. interest.co.nz analysts expect other banks to follow the market down with their own cuts to advertised rates in the next week or so.
The fact that one-year-fixed rates can be had at a meaningfully lower cost than floating rates (which generally average 5.75% from banks), customers will see lower repayment amounts by switching, or can pay their loan off faster by switching and keeping the payments unchanged.
Customers could save about $28 per month in payments for each $100,000 borrowed in a typical loan arrangement. Over the life of a 20 year loan, that is equivalent to about a $6,775 interest saving. Keeping payments unchanged will shorten the loan by one year and four months and save $11,525 in interest over the life of the loan.
You can work out how this may affect you by using this calculator ».
These indications assume the change is permanent over the life of the loan, and that is unlikely to be the case. But such calculations are useful in assessing options and benefits between making lower payments or paying loans off faster (which is also known as 'deleveraging').
The latest up-to-date mortgage rates are here »
Term deposit rates
Term deposit rates also continue to fall.
This morning, ASB and BankDirect both removed their 160 day rate of 4.50% and replaced it with a 5 month rate at 4.40%. This follows Westpac's Friday reductions in term deposit rates for all terms of six months to two years (including their SuperGold rates). Westpac did raise its 4 month rate to 4.00% from 3.25%, bringing that shorter term into line with their newly reduced six month TD rate.
You can find all the latest up-to-date term deposit rates here » and here »
Fixed mortgage rates
Select chart tabs
(Updated with BNZ's 18 mth Classic mortgage rate cut, TSB's 1 year cut, Kiwibank context. Updated further with ASB rate cuts.)
26 Comments
Not necessarily. If it requires borrowers to change banks the 'saving' might well go down the tubes (long term) if they have to start another Table Loan with a new bank. Sadly that's the way Table Loans work for anyone who's being paying into one for any period of time ..... and most people get 'sold' on Table Loans as opposed to Reducing Loans.
Agree that lending margins have increased, but as an investor I've also noticed that deposit rates are much higher than they should be (relative to wholesale rates). I guess this is the cost of funds increase we keep hearing about.
I'm not so sure that floating mortgage rates can come down, unless there is a comparable decrease in deposit rates - which of course I'm not a fan of!
I understand the desire to have big corporates make smaller profits. I'd certainly like to get higher investment rates, pay less to my Teleco, electricity supplier etc.
This raises 2 questions which I'd like to see one of your journalists explore.
1. When is enough profit enough? We all cringe when banks announce massive dollar profits, but how does this compare to other industries as a return on capital? When BP makes a multi-billion dollar profit in a quarter, the average man in street in the US goes nuts - but is the profit too large in terms of return on capital? How do our banks line up against telco's, electricity suppliers and against our large retail chains? Who is really making the big profits?
2. Many on this site criticise large corporate profit making, but how many of them are also investors in those same companies? The question is, who drives these corporates to make such large profits - is it the shareholders? We seem to have this natural tension between required return by those invested in shares of various corporates, but those same people often don't like seeing these corporates making large profits - its a dilemma.
I look forward to seeing how your other readers feel about these issues.
Follow Wayne Swan's lead in Australia , and introduce a " Super Profits Tax " ...... firstly on the banks , next let's take aim at those rich prick dairy farmers , then the electricity companies ( oooh , hang on , we own most of those don't we ...... s'not an outrageous profit if we do , only if we don't ) .....
....... we'll teach those profiteering greedy companies & farmers to spread the benefits of operating here with the wider community ......
Everyone is entitled to a " fair share " , mate !
[ ...... alternatively , let the free market mechanism work it's magic , and competiton from existing banks & new entrants will prevent the big 4 banks from making " outrageous " profits ...... but we won't do that .... 'cos it would be easy , and effective ..... ]
The bank's lending margins must be bigger than they portray. I'll give you a recent (This week that is!) example.
My brother-in-law has a substantial mortgage, $500,000+ on floating, so he decided to shop around to see what he could eke out of the competing banks. He found they were tripping over one another to comply and cajole him over to their side. In the end he was offered 5.15% on a floating rate; 4.99% 1-year fixed or 5.55% 3-year fixed!! Not bad I said! falling off my chair!!
Now after years of paying through the nose at his current institution he's faced with some really good choices but he doesn't know what to do? He asked me, "should I stay floating and hope that the swap rates fall further and then fix" I said maybe he should just stay floating and enjoy the low rate offered. I suggested the notion that the rates weren't going to be moving for at least 6 months and when floating rates do go up (and he jumps off that rate automatically) in 3 years time he would still have been better off than if he'd fixed.
What to do guys, any thoughts, given the rates quoted?
Yes the margin on both floating & fixed has increaed dramtically over the past 3 years because the spreads banks have paid on their funding has risen dramatically over the past 3 years (from zero to around 150bps currently) - what has changed that suggests that their cost of funds has changed such that they can reduce this ? in fact in the past few weeks its risen if they had go to the market ?.
Exp - yes shopping around in this environment is very rewarding as the banks are hugley competitive for business at the moment and will squash margins to retain/gain market share - nothing new there but certainly intense at the moment..
The risk your brother-in-law takes is that when the market finally get spooked on an impending rate rise, even if they think its still 6 months down the road, a very small minority will be quick enough to lock into fixed rates before they disappear higher. Even in the past 2-3 years we've seen a situation where long term fixed rates rocketed nearly 1% within 24 hours (certainly a few days) - the wholesale market talking in minutes to react, retail borrowers days, or weeks. And there was a third less people floating then than now i.e. the next move could be even stronger.
You don't know the timing on the event, and its possible, even likely, not to be before year's end, but no one can be sure when - fix some, leave some floating is the right approach. All eggs in one basket is what the mugs do as they over-rate their ability to see it and act quickly enough
Thanks for your comments Grant. I was thinking that if he took a Float/18-month/3-yr split he should cover a pretty good hedging base from which to react as events happen along the next volatile 3 years. And they will be volatile, the markets are not in for an easy ride. I told him that although the temptation is always there to fix and forget for 5-years, the reality is that [that] volatility and the opportunities it will create might make him regret anchoring himself to a 5-year rock. Are things going to be interesting or what, it makes the actual GFC of 08/09 look rather predictable and formulaic in being dealt with. There is no predictability left, which is why flexibility is the only way to survive - and I don't just mean in life and marriage!
All very true, but providing he plans to be in his house of a while, I wouldnt rule out a portion in the 5 years while the yield curve is so flat - it will make minimal upside difference to his average rate but could be key if some of the worse case scenarios play out. Volatility and unpredictability is all you can expected over the next 3-5 years, so reducing your risks in this environment to something you can handle is far smarter than thinking you know what will happen.
That's true, sounds like a 4-way split might be on the cards as he isn't planning on moving or selling any time soon. Expect the unexpected has never rung more true than in today's climate; only a fool would claim to know what is happening, as that would make him clairvoyant.
If there are any young couples reading this, draw yourselves a grid with fixed and floating on the top 2 column titles, and decrease and increase in interest rates as the row titles. You'll find that 3 of the results you input produce mild boredom, disappointment or a faint smile. One of the results spells disaster if you are highly leveraged (as we all are when we're young) buying in a market which is so far away from fair value it's not even funny any more, and fancy ourselves as clairvoyants (as all of us do, young and old). Then go buy yourself Fooled by Randomness by N. Taleb.
Then disabuse yourselves of the notion that the bank wouldn't lend you money if they thought you had a chance of crashing because they would lose money too at that LVR they're graciously providing you. The LVR only applies to your balance sheet, not theirs. They have something called a FBR which is why bank gurus talk scared in a downturn but never seem to break a sweat on TV. (See article on bank profits).
Finally, look around you and see our older citizens who are now poorer by about 6bill because they tried to squeeze blood out of a stone.
Good luck with your decision. The casino is full of people that got lucky long ago and convinced themselves it was skill.
PS I'll send you 10 bucks towards your first piece of dirt if you can tell me what FBR stands for.
You can get very good benefits by bargaining with the bank. They do want your business and will deal to get it. So go and hussle now.
Just what is the right option of fixed etc will change month to month and there is an imevitable crystal ball factor when deciding. Really you just don't know. But you have to make a decision and even ignoring it is a decision that will have a fallout. Good or bad. So go and think hard and/or toss a coin.
The is a volatility risk and even fixing puts this off for only a limited time. So the best protection is to get rid of debt. Hard hard work that, takes years. Although every day you do it gets better. And it really pays off. Bigtime. So go sweat.
I need some advice please...I would probably characterise myself as an attractive banking proposition (more than $500k in debt, high equity %) and currently have a good chunk of that on floating rate. At the time of taking out the loan the bank offered a 0.50% off their published floating rate (5.75%). Now it seems the market is more competitive and I want to get them to sharpen their pencil. Can someone in a similar situation please tell me if I am being realistic asking for another 0.25% discount, or is this unlikely? it would be good to know before I ask as I can be a bit more demanding/aggressive with the question...thanks!
It seems that Exponential Naiviety above has got down to 5.15% but what discount is this off the floating rate and what bank please?
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