Shifting competitive forces as housing markets weaken, regulators stir, and wholesale interest rates drop mean that Kiwi home loan borrowers may now be getting cheaper mortgages than their Aussie counterparts

Bank profits in New Zealand are high. "Everyone knows that."

The main bank business in New Zealand is mortgage lending. It accounts for about 60% of all bank lending activity.

And bank profits in New Zealand are relatively higher than those in Australia (according to Bank for International Settlements benchmarks).

So it is an easy conclusion to jump to that New Zealand banks charge more for mortgages than they do in Australia.

But is that actually the case?

The problem is that the mortgage markets in each country are quite different. The New Zealand market is 80%+ based on fixed rate contracts. The Australian mortgage market is similarly dominated by floating rate arrangements.

But it is more complicated than that. Our mortgage contracts are relatively simple affairs; you borrow over the term at a specified interest rate.

However in Australia, the stated interest rate is just the start. There are bundle and package fees, and related 'discounts', to complicate matters. Their regulators require banks to publish a Comparison Rate to expose the true costs involved. And 80% of all Aussie home loans are wrapped up around these opaque bundle arrangements.

We have been tracking a New Zealand - vs - Australia mortgage comparison for nearly five years now, publishing the shifting penalty that Kiwi home owners pay compared to Australians. We last did that six months ago. But interest rates have been on the move recently, and no doubt more there is to come on both sides of the ditch.

And for the first time in our memory, pricing for New Zealand borrowers has now virtually equalised. (Actually, it may now be better than that, but we will come to that later.)

And this comes at a time when wholesale rates are trending sharply lower in both countries.

Here is the current comparison in the way we have done it consistently since 2015:

From a Kiwi perspective, for fixed rate contracts for terms from one to four years, there is virtually no penalty here compared to Australian fixed rate borrowers. And floating rate borrowers have seen their vs-Australia premium virtually halve.

These are the carded rate differentials - negotiation can lower your actual rates, and your effective costs will be affected by incentives and fees. (Home loan fees are more pervasive in Australia, so much so that they require banks to declare "comparison rates". The above table does not account for those costs. Also, a wider range of carded discounts are available in Australia, but only if you commit to specific product bundles. In the comparison above, we have ignored those sometimes costly, sometimes cost effective bundles too.)

In the time since we last explored these comparatives, margins to swap have moved very much in favour of New Zealand banks. And they have in Australia too. This means, wholesale rates have fallen faster than mortgage rates. But perhaps that is not too surprising; most banks are funded mainly by customer deposits; wholesale money is less important. And that is a core reason mortgage rates haven't fallen as fast as wholesale rates. Regulators have strict core funding requirements that can only be satisfied with a prudent mix. Wholesale money is needed to balance the duration matching requirements.

Margins to swap have risen +20 to +30 bps over the past six months. But the premium NZers pay over AU is shrinking and quite quickly.

However, if you applied the rates using the more normal Australian practice of charging a fee for access to standardised discounts and other 'benefits' you will get a quite different result. It is hard to equalise the impact of these packages, but in the end they are not a great deal for Aussie consumers on an overall basis. Sure, the headline interest rate might seem lower, but the overall costs aren't. Fortunately the Australian regulators require all institutions to gross up these added costs and provide a Comparison Rate.

The following adjusted table is what happens if you do the comparison on this revised basis. (The vast majority of Aussie bank mortgage books are written around these bundle packages.)

The bottom line of this updated review is that New Zealand home loan borrowers are now in a better position than their Aussie counterparts who take a fixed rate home loan, and depending on how you look at it, the benefits for being on this side of the ditch are reasonably substantial. The same is not true for floating rate arrangements, but the penalty is narrowing.