Fixing up the mortgage

As the two-year anniversary of the last battle to offer the cheapest home loan rate nears, the two main protagonists, ASB Bank and the Bank of New Zealand, have begun skirmishing again.

The large clutch of two-year fixed rate mortgages taken out at the time are about to roll off, and in the fiercely competitive New Zealand banking scene, the banks will do darned near anything to keep that custom.

Last week ASB cut its two-year fixed rate from 8.1 per cent to 7.99 per cent. The BNZ answered by trimming its rate from 7.99 to 7.95 per cent.

With the Reserve Bank indicating another interest rate hike isn't out of the question, and that there's unlikely to be a cut until at least late next year, the two-year fixed mortgage has become the New Zealand home owner's loan of preference. About 50 per cent of all mortgages are on two-year fixed rates. Head of retail banking Ross McEwan says for ASB, around half of those will roll off in the next six months. General manager of personal financial services Blair Vernon says for the BNZ, that figure will be about 40 per cent.

Vernon says this "massive maturity bubble" has become a revelation for people. "The reality is from this point forward, that's always going to be a fact of life for banking in this country. This market is almost all fixed rate now."

He says at the beginning of each year the trading banks are required to submit a duration profile to the Reserve Bank. The 2006 figures show that industry-wide, 42 per cent of all fixed rate loans will mature this year.

Thus the banks are falling all over each other to retain existing and attract new home loan customers.

Clearly interest rates have gone up, and home owners renegotiating their mortgage facilities in the next few months can't expect the under-six per cent deals they were getting two years ago. However, Vernon says the seven to eight per cent mark is a "psychological tipping point" for customers, and if the number is below eight, people tend to be less anxious about how much their mortgage will cost them. "If today the two-year rate was 8.1 per cent say, there would be far less interest in it in comparison to a 7.5 per cent rate for five years, for instance."

While the trading banks take the lead in the latest price war, non-bank lenders are unimpressed.

"I like competition but I don't like irrational competition, and so we're effectively all going to have to lower our margins to chase the same pool of customers," says James Lockie, director of Cairns Lockie Mortgage Bankers. He says the new two-year rates are too low, based on where the wholesale market for money is, and he believes ASB and BNZ will not be making a profit on the loans. "They're hoping customers will remain for a longer period of time to justify this pricing."

He says Cairns Lockie did lose customers two years ago during the last BNZ/ASB battle over cheap, two-year rates.

Mike Davy, senior product manager housing for Westpac, says the latest pricing is undermining margins. "We don't believe that it's in the industry's best interest to drive rates down below market."

However, Davy says Westpac has learnt from 2004 that it can't afford to be left out. He says it will follow the other banks very quickly, and is currently offering 7.99 per cent for two years, but "we won't be seen to drive down that two-year rate".

Davy says Westpac offered a competitive 18-month rate at the time of the last price war, and thus its 'maturity spike' happened in May and June. He says it was happy with its customer retention rates following that. "We know that other banks now will be quite sensitive over this time. Westpac has got its eye firmly on the housing market because we are in a position to be able to take advantage of that."

The BNZ's Vernon denies the pricing is irrational. "Rationality is a function of the total market and all its participants." He agrees the margin on 7.95 per cent is thin, but says it's not dissimilar to other mature, competitive banking markets such as the United Kingdom. However, he says the difference is that in the United Kingdom banks issue far more mortgages on floating interest rates, from which they make greater profits.

Meanwhile, mortgage brokers are warning home owners to beware of banks bearing gifts. Miranda Caird, managing director of broking firm Roost, is urging people to shop around. She says there can be all sorts of fees attached to a mortgage which would effectively wipe out any savings you make on a slightly lower interest rate.

Certainly the savings from the lower two-year rates now being offered are not big. An 11 basis point - or 0.11 per cent - reduction on a $200,000 mortgage will save the home owner $220 a year.

Caird says people should be looking around, and also asking if they're getting the best deal within their existing bank, as there may be a product which better suits their needs. She says Roost deals with 16 lenders offering 110 products. "I don't think customers are always aware that there are actually choices within the lender that they're with. We're saying, be more savvy about what you're getting, rather than chasing rates."

She says mortgages come with a raft of fees - such as establishment fees, rollover fees, transfer fees if the mortgage holder sells and buys a new house during the term of the loan, and break rates and discharge fees if the mortgage is discontinued before the end of the term.

Caird gets hot under the collar that banks don't always volunteer this information. She tells the story of clients who recently bought a business, using their unencumbered home as security. Despite it being a home loan, the bank wanted to charge her clients the commercial interest rate - 1.5 per cent above the residential rate - until she intervened, telling the banker better deals were available elsewhere. "All of a sudden they backed down.

"It's all of these things, and fees and things, that are going on that people just don't understand."

For their part, the banks says fees are a good reason not to change lenders when your mortgage comes up for renewal. Blair Vernon says switching could involve legal and documentation fees as well. He says if they stay put, customers often will not face any fees at all. BNZ charges no rollover fee, except for $150 on its Global Plus home loan product.

As for letting customers know what they're in for, Vernon believes BNZ does. "We've worked hard to make sure that our fees, our interest rates and everything about our home loans are well disclosed."

And if customers do want to switch banks, the BNZ will make it easy for them. Customers can give BNZ limited power of attorney over their accounts, and the bank will do all the leg work in transferring over all aspects of their business.