By Gareth Vaughan
The current trend of banks offering mortgage "specials" conditional on the borrower having a reasonable slice of equity in the property may herald a greater focus from banks on risk based pricing of home loans.
BNZ this week revealed a new advertised four-year mortgage interest rate of 5.89%, undercutting those offered by its rivals. The BNZ rate is, however, only available for customers with at least 20% equity in the property provided as security. This follows a similar move by ASB on July 2 when it cut its advertised five-year, fixed-term mortgage interest rate by 51 basis points to 5.99%, - for customers with a loan to valuation ratio (LVR) of under 80%.
These LVR conditional offers from two of the big four banks follow a spate of similar such "special" offers from Kiwibank dating back to last year. Kiwibank's latest mortgage "special" of 4.99% fixed for six months, requires borrowers to have at least 30% equity in their property. Meanwhile, SBS Bank has also been offering LVR dependent "specials" of 5.99% for five-years and 5.65% for 24-36 months, to borrowers with LVRs within 80%. And TSB Bank's market leading 5.30% two-year rate requires equity or a deposit of at least 20%.
Squirrel Mortgages principal John Bolton said what such moves may signify is the first foray into risk based pricing.
"What you have tended to see historically is when you get loans up to 85, 90, 95% (LVRs) you tend to get a premium put onto the rates. Higher LVR lending attracts additional borrowing costs, which reflects the risk," said Bolton.
"If you think of your carded rates being some sort of mid-point, then equally for attractive business you're tending to get discounts below the carded rates. A lot of that has been below the counter, but what you're sort of seeing and Kiwibank probably started it, is that banks are saying 'if you've got more equity in your property you're going to be able to get a better rate out of us.' End of story."
Some of the SBS "special" offers also have conditions such as the borrower having to have all their banking with SBS and a maximum debt servicing ratio of 35%. The bank says this maximum debt servicing ratio is a formula used to calculate where a customer can met a financier's lending criteria in terms of percentage of repayments against income. The exact calculation takes into account the debt repayment obligations of the customer (eg principal and interest on mortgage, credit card repayments, personal loans repayments etc) and divides this by income (salary/wages/WINZ, percentage of overtime/bonuses, percentage of rental income, adjustment for student loan), SBS says.
'Mitigating credit risk with margins being pushed hard'
Tim Loan, SBS Bank's general manager for finance, said attaching conditions to mortgage offers such as minimum LVRs or maximum debt servicing ratios isn't a new development for SBS. However, Loan said SBS has probably been more explicit in its recent advertising.
"The rationale (which I'm sure you've probably realised) being that part of the margin on a mortgage is needed to cover credit risk - ie. a certain portion of the loans will go bad," said Loan.
"At the moment, and particularly with some of these offers, the margin on the mortgage loan is being pushed extremely hard. By imposing these type of conditions we are mitigating the credit risk and thereby able to justify a lower margin on the mortgage."
"For example, if the customer is better able to service the loan or has more equity in the loan, then the risk of the credit loss to the bank is greatly reduced. In relation to the full banking condition, we have found that where we have the total relationship with the customer they are also generally a lower credit risk to the bank," Loan added.
"I guess the logic we are using is that if it costs us less to supply certain customers a product, those customers should get the benefit of that."
The mortgage 'specials' conditional on 20% to 30% equity levels come at a time of strong growth in the volume and value of mortgages due to customers switching between banks, but little growth in the overall home lending market. The latest weekly Reserve Bank mortgage approvals data shows 7,179 home loans were approved in the week ended July 13, up 35.5% year-on-year, valued at NZ$1.166 billion, which is up 51.8%. However, the central bank's latest sector credit data shows total housing debt up just 1.5% in the year to May to NZ$175.148 billion.
Bolton suggested that given the high level of refinancing, it wouldn't be a surprise to see the strategy of "special" mortgage rates offered with strings attached continuing.
"My view historically has been a gradual move to risk adjusted pricing makes sense. Not all risks are the same and it's actually a good thing for consumers the more sophisticated the banks get in terms of understanding the risk and pricing for it," said Bolton.
He noted that business banking tends to risk adjust price, and other industries - such as insurance - have "very sophisticated" risk adjusted pricing. Such pricing was probably the long-term future of residential mortgages too.
"It's right that banks price relative risk, they've done it for ages in terms of above 80% (LVRs). All you're seeing now is a bit more of it below 80%. Pricing's obviously a major driver of competition at the moment," Bolton said.
Kiwibank 'supporting and rewarding deleveraging'
Meanwhile, Kiwibank is taking credit for starting the trend of LVR linked "specials", with its spokesman pointing out the first one offered was in 2008. Back then Kiwibank offered a two-year rate of 8.99% and three-year 8.79% rate only to home owners or home buyers with 20% or more equity in the property.
The Kiwibank spokesman says recent "specials" have focused on the 70% LVR level purely because as New Zealanders have deleveraged post the Global Financial Crisis (GFC) the bank's staff have noticed this is a level many customers seem to aim for.
"It therefore makes sense for us to support and reward this effort by customers to reduce their overall debt levels, something Kiwibank has always stood for and we therefore see us continuing with these type of offers in the current environment."
The Reserve Bank has required banks to include disclosure on LVRs on residential mortgages in their general disclosure statements since the March quarter of 2008. Although some banks wouldn't write loans with LVRs above 80% at the height of the GFC, they have been over the past couple of years with some openly advertising loans from as little as a 5% deposit. In May Reserve Bank Deputy Governor Grant Spencer said limiting banks' LVRs was an option that could be implemented to clamp down on frothy asset price and credit booms.
See all bank advertised home loan rates here.
This article was first published in our email for paid subscribers this morning. See here for more details and to subscribe.
10 Comments
This means if you have a house with more than say 50% equity then you should be calling your mortgage broker or banker on Monday morning and asking for a big juicy discount.
Certainly you shouldn't be paying the advertised floating rate.
This could be an awful lot of work for some banks. They'd have to go through and reprice their entire mortgage book.
I suspect they'll rely on the usual inertia and laziness of their customers to profit from the low risk/high rate customers, or worse, pass that profit on by offering low rates to new customers who are high risk but new and in a competitive mood.
cheers
Bernard
Exactly... or less than $10/month
I have read many threads latterly to "get hold of ones bank monday morning and negoiate"
And yeah some of the % numbers are impressive claims, but end of the day it can be spending a pound to save a penny.
On the other hand 'loyalty' could be a big PR for banks...those who paid on time for 20yrs, good equity, and give the discount...hold onto customers...much more impressive than the pin badge Kiwi bank sent out a few years ago.
Steps
When I wielded LLA (Local Loan Approval) authority, when still an occasional Moa was seen in the Waitakeres, this level of equity was the prudential norm, not "special". Herein lies the heart of the unaffordable mess housing and debt have got to in NZ: too easy credit (plus post 1982 queer tax rules for speculators) = house price inflation that has put the whole economy at risk. If serious measures were now taken to get the average house price back to a historical normal ratio of 3x the average wage, all the banks would be bust! It may come to that.
Ergophobia
The question to answer GH is; what benefits the banks best?.....today it's pumping cheap credit into their bubble..using a poodle govt and gutless RBNZ to do the dirty work and spin the BS.
Down the track and a bank will move to grow fat on a collapse of other banks.
Keep an eye out for the fault lines in the banking cartel currently in operation in NZ. You can bet that more than one bank smells the failure of the others...easy meat and fat gains to be had. Just a question of which of the big four turns first, or which new bank refuses to go along with the 'game'
You may be right, but with every 'seen' bailout as you call it, there will be political consequences, each one leading closer to revolution due to bailouts creating only one thing........continued and deeper poverty for the fast disappearing middle class who make up the majority of the workforce
Or otherwise known as loan-sharking ... at the detriment of the lower income house owners.
So cheaper loans for the wealthy (ie with plenty of equity), and more expensive loans for those that can't afford the loans (low equity).
Actually equity is not the whole equation - there's plenty of dual/good income couples/households that are quite low risk even with no/low equity.
Another measure which some banks use is - how much disposable after tax money is available after all fixed expenses are deducted - normally at least $1500 a month.
All these so-called 'deals' indicate is the very risky state our global economy is in. The Party well and truly continues to wind down with absolutely no outlook of a restart. Equity involves having real savings. Savings require a disposable surplus in wages after living costs. Wage increases rely on productivity & competitiveness for the individual business.
One credit boom and bust does not imply another will be able to follow without serious fundumental change and we have yet to see that 'globally'.
For now, the recession will remain and gradually unwind the ridiculous credit creation of the past decade or more whether we like it or not. A slow "death by a thousand cuts"
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.