Mark Fowler: Can someone explain variable rate home loans in NZ?

The truth of the matter is that customers are held captive when they are locked into fixed term mortgage rates. Photo / File

COMMENT:

In the wake of the Royal Commission into the banks in Australia and the ongoing saga with the ANZ David Hisco dismissal in New Zealand, it has been nothing short of 'open season' on the domestic banks.

Recent commentary has now turned its focus to topics such as the level of interest rates charged on credit cards. Kiwibank has front footed this recent issue to some degree, dropping its zero cash interest rate on their credit cards to 13.95% per annum from 22.95& and its gold purchase interest rate dropping to 13.95% per annum from 17.90%. We could argue whether the 'double digit' interest rates are still justifiable considering current interest rate settings but at least they are trending in the right direction.

With that in mind, can someone then please explain the variable rate home loans in New Zealand? At last glance, the variable (or floating) rate mortgage rates being offered range from 5.65-5.80% at the major banks. If we look across the ditch, National Australia Bank are offering variable mortgage rates of 3.55% in their home market, despite; the fact that the official cash rates of Australia and NZ are 1.25% and 1.50% respectively. With interest rates predicted to fall further and very real discussions now being had around the potential for negative interest rates the banks continue to get away with this inflated variable rate in New Zealand.

The truth of the matter is that customers are held captive when they are locked into fixed term mortgage rates. In other words, if you have your mortgage on a floating interest rate you are free to transfer across to a competitor at any stage without occurring any break fees. The fact that you can access one- year mortgage rates below 4.00% but floating only a fraction under 6.00% should cause us to question whether this is leading to good customer outcomes, since it potentially exhibits anti-competitive behaviour. The interest rate differential encourages customers to lock into a fixed rate, dissuading them from looking elsewhere.

The banks will likely point to increasing offshore funding costs, or the threat of higher capital requirements to justify these interest rate settings, but you only have to look across the ditch to question the validity of that argument comparing their variable rate levels.

There are many factors in play when making decisions around re-financing mortgage debt. Not least, the rates that banks are offering and the outlook for future interest rates.

We have seen recent enquiries into electricity pricing and the price of petrol at the pump. Maybe, its time we have a closer look at bank pricing.

- Mark Fowler is Head of Investments at Hobson Wealth Partners.