Kiwibank's home loans under 7pc

By KEVIN TAYLOR

Mortgage minnow Kiwibank has made another play for home loan business by cutting its floating rate to below 7 per cent while the big banks hover around 8 per cent.

The state-owned bank yesterday cut its floating and fixed rates 0.15 percentage points from Monday, with the floating rate dropping from 7.1 per cent to 6.95 per cent.

The bank says the cut represents savings for mortgage holders of more than $1000 a year on a $100,000 loan.

It is the third time in three months that Kiwibank has gone against the trend by lowering rates in an effort to attract customers.

Chief executive Sam Knowles denied yesterday that Kiwibank was desperate for business.

The latest drop was "very affordable" as the 90-day bill rate had fallen in the past month or so by about 0.15 percentage points.

He said it was clear interest rates must fall to match the decline in the 90-day rate and longer-term interest rates, both of which had significant impact on prevailing mortgage rates.

The big banks had kept home loan rates the same and the margin between their rates and the 90-day bill rate was even bigger now, he said.

"We watch rates pretty closely and we believe there's scope to bring all home loan rates down.

"It's really just a question of fairness - as our costs come down, we pass that on to thecustomers.

"Our competitors aren't doing that, quite the opposite. They've obviously got very large margins at the moment."

Yesterday morning the 90-day bill rate was 5.88 per cent. Knowles pointed out that the big banks' floating rates were around 8 per cent.

Last month the Reserve Bank raised the official cash rate (OCR) from 5.5 to 5.75 per cent. The big banks boosted their home loan rates in response.

The consensus among economists for the Reserve Bank's next review on Wednesday is that the bank will not increase the cash rate then, but some think it will foreshadow some further rise.

The futures market, however, has all but discounted any rise in the year ahead.

Massey University senior lecturer in banking studies David Tripe said Kiwibank was hardly a major threat to the big banks.

He thought the other banks would be reluctant to move mortgage rates until the decision on the cash rate next week.

"Certainly, the way the 90-day bill rate is moving, it seems that the market is not expecting any increase in the OCR and the current levels of the floating mortgage rates would be on the high side."

Tripe said Kiwibank could make its cuts because it did not have to rely on the 90-day bill rates like the big banks.

Its sources of finance were the taxpayer-funded capital injection that got Kiwibank started, and retail deposits.

Last month Tripe said Kiwibank's share of the home loan market was so infinitesimal the drop in fixed rates it announced then would barely make a ripple. He estimated Kiwibank might have 1000 customers from a home loan market of about half a million borrowers.

Knowles said in response yesterday that Kiwibank was "growing quickly".

Many customers were transferring mortgages from other banks, helped by Kiwibank paying the legal fees.

The bank has done only limited advertising so far, but Knowles said a campaign would start soon in print and on television. He would not say when.