Mary Holm: Time for banks to speed up cuts

Banks' tardiness in reflecting OCR reductions in their own rates makes them seem to be creeping like a snail unwillingly to a rate cut. Photo / Northern Advocate

I've just finished discussions with National Bank regarding my floating rate loans, in light of the official cash rate reduction last week. They say they will reduce their floating rate from March 29 because they are legally obliged to write to all consumers and inform them of the changes.

I have argued that:

* It doesn't take three weeks to send a letter in the post. I would be happy with an email, which would take a significantly shorter time. This would surely comply with their legal obligations. Regardless, they have informed me of the reduction, so it's not as if I'm unaware of it.

* New customers benefit from the new rate immediately.

* Surely, from a customer's perspective a rate reduction is not the same as a rate rise; that is, where possible the bank should pass on the benefit of the reduced OCR as soon as possible to customers. It's not as if anyone is going to say, "Hmmm, I didn't get my letter, please charge me the higher rate for an extra three weeks!"

I have about $1 million on floating, so three weeks at 50 basis points would save me $288 in interest. It seems the bank is profiteering by delaying the rate reduction and treating long-standing customers with disdain.

Would love to get your view on this.

It certainly sounds as if the bank is creeping like snail unwillingly to a rate cut - with apologies to Will.

However, National Bank is hardly alone. ASB, ANZ, BNZ, Kiwibank and Westpac also reduced their variable or floating mortgage rates, effective between March 10 and 14, but haven't applied the lower rates to existing customers until March 24 to April 4.

ASB had the biggest gap - March 11 for new customers but April 4 for existing ones.

National Bank says the delay for current customers "applies when rates are increased as well as decreased, in order to be fair to customers. Last year there were two rate increases, taking 21 and 22 days between the official cash rate announcement before those increases were passed on to customers. "If changes were made with immediate effect, we would need to be consistent for both increases as well as decreases."

I'm not fully convinced, though. As you say, nobody is going to complain if their mortgage rate is cut more quickly than it rises. Come on, banks. Be the first to advertise that, "we're slow to rise, and quick to cut."

Fixed-rate mystery

Wondering if you could possibly help me investigate this UFO - unidentified financial occurrence.

The story goes like this: in early 2009 my father was doing errands in the Glenfield Mall. While passing the ASB branch he saw - hovering prominently in the bank's entrance-way - a bright yellow placard.

This is now the hardest part of the story to believe. He claims the placard displayed mortgages of 4.99 per cent for five years fixed. Several weeks later the placard had just ... disappeared. Never to be seen again.

Our family now refers to this as "The Great Mistake of 2009", and it has firmly entered our lore as something my parents should have signed up for.

The global financial crisis had just started. My father claims that around the UFO time he distinctly remembers a female financial Herald on Sunday columnist proclaiming this as a "once in a lifetime opportunity". The financial columns around that time were discussing if it was worth breaking the fixed rate (around 8 to 9 per cent) and going to lower ones being offered.

Although my father is absolutely convinced the rate ASB offered was 4.99 per cent for five years, I'm inclined to believe that it was more likely 5.99 per cent. Or if ASB did offer 4.99 per cent, it wasn't for five years.

I attempted some research to prove that, but quickly got overwhelmed with all the data. Is there any chance you can help solve this mystery? If that topic ever comes up again over a family dinner, I'd like to be able to prove that "The Great Mistake" never really was one.

It seems your Dad might have embroidered the story a bit - as every good raconteur does.

"The 'Great Mistake of 2009' was actually 'The Great Promotion of 2009' by ASB," says the bank's acting chief executive, Ian Park, ASB's head of retail at the time.

In late January of that year, the bank made all fixed rates the same for two weeks, regardless of the term. "However, the rate was 5.95 per cent, not the 4.99 per cent of Glenfield folklore. ASB's five-year rate dropped markedly from 6.95 per cent to 5.95 per cent, before lifting to 6.25 per cent a fortnight later," says Park.

At the time, "short-term rates were still higher than longer-term rates, and offshore events were putting downward pressure on the longer-term wholesale rates. However, the markets were volatile during this period, hence the short-term nature of the offer."

While the bank sees the UFO as a promotion rather than a mistake, it is indeed a pity that your parents didn't take up the offer.

I must say, though, that the financial columnist was braver than I am. I would never write about "once in a lifetime" rates. Who knows what lies around the corner - as recent events have proved?

Counting in expenses

Love your columns and agree with you 90 per cent of the time. However, "you can't please all the people all the time!"

So, your simple analogy last week of buying a house for $400,000 with a mortgage of $300,000 then selling for $440,000 and walking away with $140,000 bothered me. The theory is that the house appreciates 10 per cent and your profit is 40 per cent - because you put in $100,000.

So many house sellers make claims on "profit" without factoring in legal fees, bank fees and, more importantly, real estate agents' fees. In your example, this would de facto mean you made just over the 10 per cent that the house price rose - because you would spend about $30,000 on expenses!

I wouldn't want young people thinking, "Gee, that sounds great".

Good point. But I might also add, "you can't give all the information all the time". The point I was trying to make was that borrowing makes a good investment better - and a bad investment worse - using a simple example.

If I covered every aspect of every topic every time it comes up in this column, I would run out of space - to say nothing of readers, bored by the repetition. And just the week before I had written, "It costs heaps to sell a house, what with agents' commissions, legal fees, and so on."

Still, looking back, I could have kept you happy by adding just two words - "after expenses" - to the sentence, "After some years, you sell the house for $440,000." Will try to do better in future.

Okay - does that get me up to 91 per cent?

Spreading the money

My partner and I have our own home and we each have about $100,000 in the bank or shares. My portfolio is $25,000 in shares and the rest on term deposit while my partner has all her money in term deposits spread across a couple of banks.

I am in my early 60s with a small Government pension and my partner is in her mid-50s still working and with KiwiSaver.

I was wondering if I have the spread of my money right - shares about 25 per cent and bank deposits 75 per cent? And should my partner, with all the money in the bank, diversify into the "high-quality bonds" that you referred to in a recent column? If so what are they, and who do I contact about the investment?

Two points to start with. Firstly, I assume your mortgage is paid off. If not, use your savings to do that.

Secondly, you should also join KiwiSaver. If you are not employed - which seems to be the case - you put in up to $1043 a year for five years and the Government matches that, as well as giving you the $1000 kick-start. It's more than $6000 "free" money - plus the returns you make on that money.

If you were an employee, it would be even better. You would put in 2 per cent of your pay, your employer would match that, and the Government would also match your contributions up to $1043 a year, plus the kick-start.

KiwiSaver is particularly attractive for people 60 to 64. They get five years of incentives regardless of what age they join. And most 60-pluses don't mind at all that their savings are tied up for five years.

Now to your questions. Think about when you two are likely to use your savings, and leave the money you expect to spend within three or four years in bank term deposits.

What about the rest? A good place for money for the medium term - up to about 10 years - is high-quality bonds or a bond fund.

Basically, bonds are similar to bank term deposits. You get your money back at maturity and also receive interest - usually at a higher rate than banks pay. That's because bonds are riskier, but if you diversify over several companies and choose bonds with high credit ratings, you will almost always be okay.

Unlike term deposits, you can sell a bond before maturity. And you'll get more than you paid for it if its interest rate looks attractive. On the other hand, if rates have risen in the meantime so that your bond is unattractive, you'll get less than you paid for it. Confused? Just hold your bonds to maturity, as most New Zealanders do.

A stockbroker can tell you what bonds are available. Or you could check out KiwiSaver providers, who often offer both KiwiSaver and non-KiwiSaver bond funds. The value of a bond fund investment will fluctuate with interest rates - but it should still be a pretty solid medium-term investment.

For 10-year-plus money, shares come into their own. However, I'm a bit worried about your portfolio. It's hard to have good diversification - with at least 10 different shares and preferably 20 or more - with just $25,000. You might be better off in a share fund. Again, look at KiwiSaver providers' offerings.

Readjust your investments every year or two, moving some from bonds to term deposits and some from shares to bonds, to keep within the time frames.

Mary Holm is a freelance journalist, part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.