KEY POINTS:
Bank chiefs are resisting pressure to be lenient with customers wanting to break fixed-term mortgage agreements.
Rapid falls in floating interest rates and new fixed rates have meant many are left locked into higher payments.
Finance Minister Bill English said yesterday he expected banks would be pressed to reduce the penalties for breaking mortgage agreements to get cheaper interest.
And state-owned Kiwibank could expect a discussion with him as shareholding minister on the subject, he said.
The cost of breaking a mortgage was highly variable. "I think that is going to influence people's choice of banks."
The slashing by the Reserve Bank of the official cash rate from 5 per cent to 3.5 per cent will flow on to new borrowers who opt for floating rates and to borrowers whose terms are expiring.
But many borrowers are feeling stranded on high fixed rates as the gulf between them and the lower rates widens.
Labour leader Phil Goff yesterday called on the banks to waive break penalties - not universally, but for borrowers in genuine hardship where perhaps one partner is made redundant.
Kiwibank spokesman Bruce Thompson said the bank would be happy to brief Mr English on its methodology for mortgage break rates but did not intend to lower them because they reflected the cost to the bank.
"These are not estimated costs or costs which the bank is looking at making additional income...These are actual costs that the bank incurs.
"When people become aware of the [break] costs, sometimes they are alarmed, sometimes they are angry. But other times they are pragmatic. They realise that if banks don't break contracts when rates rise, if they [the borrowers] decide to break their mortgage when rates fall there will be costs."
Mr Thompson said that while Kiwibank's break rates were based on wholesale rates and were therefore higher than retail rates, its interest rate was lower than other banks.
Westpac spokesman Craig Dowling echoed Kiwibank's sentiments, saying his bank's high mortgage break rates "reflect the high costs we face" when a client breaks a mortgage. "It is not something we would fiddle with...We take on risks when we lend at a certain rate and there are costs when these get broken."
Asked about breaking mortgages, Reserve Bank Governor Alan Bollard said yesterday: "We note that there is a matter of private contract on this. When people go to banks for mortgages they sign up to a set of conditions, and normally when they sign up there, there will be some clause which mentions breaking a contract and the implications for that."
In his statement announcing the new official cash rate, Dr Bollard spelled out his expectation that banks pass on the lower wholesale rates to their customers.
The banks' margins had increased but the volume of their business had declined, he said. "They are very aware that it is our expectation that appropriately gauged cuts will be passed on."
That was reinforced by Mr English. He said the Government had provided guarantees to the banks and the Reserve Bank was providing funding facilities to them.
"So the taxpayer is pulling their weight in keeping the banking system stable. There is an expectation that the banks are going to pull their weight by making sure there is a reasonably available credit to keep the economy moving along."
Dr Bollard said more borrowers were going to short-term loans.
The average duration of a housing loan had fallen from 22 months to less than 14 months.
"That is a remarkable reduction in term rates and it means that any borrowers at the minute are very sensitive to where the official cash rate is and where it may go..."
