More kiwis tipped to move to floating mortgages

Westpac chief executive George Frazis Photo / Dean Purcell.

New Zealanders will continue to move to floating rate mortgages as the Reserve Bank keeps interest rates low to revive the economy, says George Frazis, Westpac Banking's local chief executive.

About half of new mortgages with the country's second-biggest lender by assets are on floating rates, compared to about 40 per cent of existing loans, Frazis said.

He's picking another 25 per cent to switch next year and a further 10 per cent after that, though "not all will go to variable rates."

Westpac's customers are in step with mortgage borrowers across the spectrum, with RBNZ figures showing more than half of all residential mortgages were on floating rates at the end of March.

Variable home loan rates at the nation's five biggest lenders average about 5.9 per cent currently, while three-year fixed rates average 6.95 per cent.

"We've got customers going off historically high fixed rates, then going to lower variable rates," Frazis said.

"That does end up being win-win for both customer and bank - we get improved margins, and there are more reductions in the interest rates customers are paying."

A 22 basis points increase in interest rate margins drove a 68 per cent boost in cash earnings for Westpac's New Zealand business to $210 million in the six months ended March 31.

That more than offset any increase in the cost of wholesale funding, the bank said yesterday.

The benchmark interest rate is poised to stay at a record low 2.5 per cent for most of this year after Reserve Bank Governor Alan Bollard cut the official cash rate by half a percentage point in March to help shore up confidence after the February earthquake in Christchurch stamped out the flickering signs of economic recovery.

"The Reserve Bank's given strong indications rates are unlikely to go up this year, which means there's more to do next year," Frazis said.

The rise in home loans on floating rates means Governor Alan Bollard can have more impact when he does hike the OCR again because the increase will immediately be reflected in variable rates while those on fixed are shielded.

When Bollard embarked on his 2007 tightening cycle, almost three-quarters of mortgages were on long-term fixed rates.

Frazis said both personal and business customers have been shoring up their balance sheets by boosting savings and cutting debt, and that will help stoke investment when confidence returns.

Westpac will continue to focus on attracting small- and medium-enterprise businesses and rural borrowers where it has traditionally been underrepresented in its market share, he said.