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Many homeowners and potential buyers may have thought they could breathe a sigh of relief after the Reserve Bank cut the official cash rate last week for the first time in five years.
Unfortunately, the relief will not come quickly. It's possible some banks may even increase mortgage rates in coming weeks.
This doesn't seem to make sense, so it's worth examining why there is this disconnection between the official cash rate (OCR) and mortgage rates.
The main reason is our low savings rate with our banks and our eagerness to borrow overseas since 2002.
Essentially, foreign lenders have us by the short and curlies through our banks and international interest rates because we borrowed so much over the past six years and became addicted to fixed-rate mortgages.
In June 2002, just before house prices took off, Kiwis had about $73.6 billion in mortgage debt. That ballooned by $85.8b to $159.4b by May this year.
Meanwhile, New Zealand's foreign debt has risen by $88b to $219b over the same period.
This is no coincidence. Almost all of our foreign borrowing paid for this mortgage spree and fuelled the housing boom. This means we are now much more exposed to what happens on international credit markets and that is translated through to us in fixed mortgage rates, which are influenced by foreign interest rates rather than local interest rates or the OCR.
The global credit crunch has made many foreign investors nervous.
Earlier this month, ANZ National had to pay almost 10 per cent on markets to borrow US$2b ($2.69b) for five years, yet the five-year mortgage rate offered to home buyers here by ANZ and National is 9.1 per cent.
ANZ National and BNZ have warned mortgage rates may have to rise, even if the Reserve Bank cuts the OCR again.
But, surprisingly, ASB cut its key two-year fixed mortgage rate shortly after the reduction in the OCR on Thursday.
ASB is much more dependent on mortgages for its business than the other banks. It needs to keep growing mortgage lending to grow profits.
Mortgages make up 76 per cent of ASB's business, while they make up 55 per cent of ANZ National's, 42 per cent of BNZ's and 46 per cent of Westpac's.
Kiwibank's mortgages comprise 88 per cent of lending so it also works hard to keep growing mortgages. The state-owned bank cut its key mortgage rate last month.
This means ANZ National and BNZ are less likely to cut their mortgage rates, but they may have to in order to compete with ASB and Westpac.
If that happens, they may choose to cut their deposit rates to maintain their profit margins. Some deposit rates have been cut in recent weeks.
The other reason some banks are more likely to cut their mortgage rates is they rely less on foreign borrowing and more on the local funds they have in bank accounts.
Term deposits have grown sharply in recent months as New Zealanders save more and shift savings from the stock market and finance companies into banks.
Kiwibank has the highest proportion of funding from term deposits, Westpac the lowest.
ANZ, BNZ and ASB all have a third of their loans backed by term deposits. This means Kiwibank can most afford to cut mortgage rates.
Bernard Hickey is the managing editor of www.interest.co.nz, a website for investors and borrowers wanting free and independent news and information about interest rates, banks, finance companies and the economy.
