A hotly anticipated rise in official interest rates expected from the Reserve Bank tomorrow is likely to lead to "cat and mouse behaviour" on floating mortgage interest rates between lenders, the head of one the country's big four banks says.
"This hasn’t happened for years," BNZ managing director Andrew Thorburn said of the expected lifting of the Official Cash Rate.
In fact the last time New Zealand had an increase in official interest rates was in July, 2010, while the last time the rates were moved at all (downwards) was in March 2011.
"So, we are now going to have something, which whilst we anticipate it, has not happened for years – IE a rising rate environment." Thorburn said.
There were a lot of factors at play in the mortgage market at the moment, he said.
There had been "incredible disruption" as a result of the October 1 imposition by the RBNZ of a 10% 'speed limit' on high loan-to-value (above 80%) lending.
"The focus on the below 80% and the aggressive competition that’s there. And the demand for housing finance, still in Auckland, because of the rising prices.
"And over 50% of business now is fixed rate. So fixed rate is getting priced everyday on the basis of the curve and how that’s moving. And the market’s already factoring in some of that."
At the moment the amount of mortgage lending by value that is on fixed rates - a year or more - is around 60%, according to RBNZ figures. That means about 40% of house financing is on floating rates. As some means of comparison, at the height of the housing boom in 2007, when the RBNZ was starting really ramp up rates, only about 14% of total lending was on floating.
So, there is an expectation that the RBNZ will get more 'bang for its buck' at the start of this rising interest rate cycle.
Thorburn said floating rates would go up “because our cost of funds is going to go up", but he did say a lot of the new business - on fixed rates - was already being priced "dynamically" due to swap rates having moved up in anticipation of interest rate rises.
As for what will likely happen tomorrow: "On the variable rate book, I think we will wait and see," Thorburn said.
Taking time
"We’ll take some time to assess what competitors do or what they might do. We’ll decide how competitive we want to be in the variable rate as opposed to the fixed rate space and then we’ll make a decision.
"I think it’ll probably take a few days.
"There’ll be a bit of cat and mouse here, because it is so competitive, right?
"People probably don’t want to be the first one to go out and do it. But I think that competition will drive some cautious activity, particularly in the light of those other things I mentioned."
Thorburn agreed that because of competition between banks, as well as the individual funding requirements of the banks, the anticipated series of rate rises from the RBNZ this year would not all necessarily get passed on through floating mortgage rates.
"So, you may not see a direct correlation."
High LVR lending again
Latest LVR figures from the RBNZ showed that in January banks' share of lending to high LVR customers had, after exemptions, fallen to just 3.8% of new commitments, against a requirement of a maximum 10%. In September, the last month before the restrictions came in, the figure was over 25%. The requirement for banks is, initially, to be under the 10% limit on a rolling average for the first six months of operation of the LVRs.
Interest.co.nz estimates of the ratio for the four months to January suggested an overall lending rate of about 7.75% on high LVR lending before exemptions - implying that banks are giving themselves plenty of room to fit in under the 10% limit when the first measurement of ratios is done by the RBNZ after March.
"The banks have…not over-corrected…but they certainly didn’t want to be at the 10. It’s too risky. You don’t want to breach that limit," Thorburn said.
“So, we’ve gone down to 9 or 8 or 7.”
"So, what you’ve got is capacity now to start to open that up and we’ve started to do that," he said.
Thorburn said in the past month BNZ had "started to do some above 80% lending again. Obviously within the 10% cap".
“What we did is was when we stopped it we went to customers that were in the pipeline – because the 10% was lower than we anticipated and the timeframe was quicker – So, you’ve got this pipeline of applications. So, we tried to work with customers to meet as many of those commitments as we could.
"And then the ones that were left we went and said, 'do you really need it?' and some said ' no, thanks I’m not going to use it anyway'. So, that reduced it and some said 'I don’t mind not using it', fine, But some were saying 'I would like to use it'. But we had to say 'no we can’t' – but there was only a very small amount.
"...But what we did with those people is we said when we can re-lend we will come back to you – and of course a lot of people thought, well they are not going to do that but actually we’ve gone back to those people in the last month and that’s been a good promise that we have carried through on.
"So, we’ve now started to lend to people we put on hold six months ago and we are starting to lend to new people above the 80%, but it will be within the 10% restriction."
10 Comments
Lets not kid ourselves about what the banks will do . The trend is so well established , there is no second guessing required .
Based on INFORMATION ASSYMETRY and without full disclosure , they will tell us that their funding costs and weighted average cost of Capital ( WACC) has gone up , and in order to protect their margins , they will be left with no option but to increase mortgage rates .
Imagine if we could all do this when costs went up ?
In typical cartel fashion , they will all do it in tandem , the market leader , most likely the ANZ will go first, with the others following in rapid succession .
The notification letters to borrowers will be printed within minutes of Wheelers announcement , and mailed before the 6 pm cut off the same day.
The new mortgage rate will be effective from 1 April .
Depositors rates will not be increased or adjusted until or if , there is a increase in demand for funds, or one of the banks moves aggressively to source new funds first .
Given the system is awash with money , this is unlikely to happen .
The borrower is quite powerless , as the all banks will all react in tandem so voting with your feet is not an option.
They can get away with it because floating rate mortgages are in many cases linked to small business and other loans , and these borrowers have no power whatsoever
Rates will go up certainly Boatman, but I'm not so sure it will be basis point to basis point in line with the OCR. They are being damn competitive out there and it sure isnt a cartel, they will cut each others throats if they can. Desposit rates will also go up, but again not basis point to basis point with the OCR. The OCR is frankly these days a guide only to where the RBNZ wants rates to go, but its the banks cost of funds and competiive pressures that determines where their rates axctually go....and you've really got to be kidding if you think they're not being competitive, just note those on here who take great prode in ghoe they haggled and played off banks against each on a regular basis over the last 2-3 years.
You may well be right about the level of competition over the past 3 years , but I am going on the experience of many years of having mortgages .
The banks usually react very quickly to the OCR , and always in tandem
We are in different times , so things may be different .
Everyone of them seems to be awash with money to lend .
We'll see and I will acknowledge you if you are correct .
No Boatman you are right, the only variable is who will lead it.
Why will kiwis not rally against this cartel??? Because the banks are institutionalized. They are part of the established order in our society and are accepted by the majority as "the way it is" because we have grown up knowing no different. Since the last cut the banks gave us in 2009 the swap rate slipped even lower yet still they did not pass on that rate cut to their customers, now with the first increase mooted they are sure to increase the interest rates they charge immediately.
The banks will suck us all dry - when rates drop they will be the last to provide the cuts back to us, when rates rise they will be first off the block. What should we do?? Pay your mortgage off as quickly as you can so they have no influence of on your life. It is as simple as that - plus a revolution to string all the bankers and politicians up and watch them swing from the gallows. The world would be a much, much better place for it believe me.
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