Loan wars: Gifts galore

Finance Minister Bill English yesterday warned higher interest rates were expected late this year or early next. Photo / APN

Flat-screen televisions, cash for groceries and even iPads - banks are competing to offer more attractive prizes to sweeten home loan deals as higher interest rates are forecast.

But commentators warn the prizes should be viewed only as a bonus once a loan has been settled.

One says the giveaways are "essentially buying your business with your money".

With little separating their advertised fixed mortgage rates, banks are dangling "free" giveaways to lure prospective customers from rival banks.

Bank of New Zealand has sent letters to some credit card customers offering $1000 for fuel or groceries and up to $1000 towards legal costs if they transfer their home loan to the bank.

TSB has offered a new iPad or iPhone 5 and help with legal fees, and ASB is trying to get customers to fix their home loans by offering a 42-inch Sony LED television.

An ASB spokesman said last night the offer was an incentive in a competitive market, and its cost did not add to the cost of the customer's loan.

Finance Minister Bill English yesterday warned higher interest rates were expected late this year or early next.

Speaking on TVNZ's Q+A programme, Mr English said higher rates combined with Reserve Bank tools and planning changes would change the red-hot housing market over the next two or three years and bring more properties on to the market.

Dr Claire Matthews, of Massey University's centre for banking studies, said people should study the entire home loan deal - including fees, terms and conditions - before being tempted by cash or giveaways.

"It might be that if you've got two banks that are almost identical, and one is offering a 52-inch television, then, hey, you might as well go for the television as well.

"But if somebody is offering a better deal, despite the 52-inch television you may not be better off."

Economic commentator Bernard Hickey said similar giveaways were seen during the 2002-2007 property boom.

"But then, the banks tended to simply use price as their main way to win market-share. This time, they are being a bit more cautious about that, mainly because they want to preserve their profit margins.

The cost of such incentives were often simply added on to the mortgage, Mr Hickey said.

"What they are doing with these offers, is essentially buying your business with your money."

Banks were competing fiercely for customers because conditions were right for them to lend, and they had incurred only extremely small losses from home loan lending.

But healthy bank profits showed the limits to that competition, Mr Hickey said.

"If the banks were the ones giving away the money to encourage you to borrow, then you would see it in lower profits for the banks. But we are not seeing that.

Mr Hickey said it was important that people realise the advertised rate was the start point in a negotiation, and haggled with banks.

"They have a lot of leeway in what they can offer," he said. "It's not like when you go to the supermarket, the cost of the Weetbix is $3.50 and that's what you pay at the checkout.

"A lot of these offers the banks make are negotiable."