Home loan rate cut to lowest in 40 years

ASB said the new home loan rate would reduce monthly repayments on a $200,000 20-year loan by $75. Photo / Janna Dixon

The ASB Bank has slashed its floating home mortgage rate to a 40-year low of 5.75 per cent.

The new variable rate is the cheapest on the market and is thought to be the lowest available to home buyers for decades.

Last night, one leading economist tipped that other banks would follow suit.

But the outlook remains mixed both for house buyers and for savers looking for higher deposit rates, because the ASB also intends to raise longer-term fixed rates.

ASB retail banking chief executive Ian Park said the bank planned to increase 12-month to five-year fixed mortgage rates shortly. He cited the rising cost of long-term borrowing overseas.

The bank said its floating-rate cut was passing on the lower cost of short-term overseas funding to customers.

It has also trimmed its base business and rural lending rates by 0.3 per cent to 10.55 per cent and 7.6 per cent respectively and is cutting on-call and some short-term deposit rates by 25 to 50 basis points.

ASB said its variable rate was now the lowest it had been since 1967.

Massey University banking studies lecturer Claire Matthews said she could not recall any other bank ever offering a lower variable rate.

ASB said the new rate - a drop of 0.65 of a percentage point - would reduce monthly repayments on a $200,000 20-year loan by $75.

It undercuts the 5.79 per cent offering from state-owned Kiwibank.

Kiwibank guarantees it will "better the price you would have paid for an equivalent home loan from any other bank with branches nationwide".

A Kiwibank spokesman said yesterday that the ASB move was the first serious challenge to its market-leading status. The bank would continue to monitor the market and review its rates.

Mr Park said the reduction had nothing to do with the fact that the Reserve Bank, Parliament's finance and expenditure committee and this week's Opposition inquiry into banking had all focused on the widening gap between the official cash rate and bank interest rates.

"We've been very consistent," he said. "If anyone looked at our annual result released last month, it showed that our interest margin over the past 12 months has reduced considerably.

"What we've seen since then is these offshore markets show some stability at lower levels. We're confident that will be sustained, and that's why we're able to pass it on.

"These other issues have not been taken into account," Mr Park said.

Labour Party finance spokesman David Cunliffe, who instigated the Opposition banking inquiry, said submissions received contended there was an effective cross subsidy from borrowers on short-term rates - mostly businesses - to those on long-term home loan rates "which would only assist a new housing bubble to form".

ASB's move yesterday could be seen as a partial reversal of that cross subsidy and, as such, "should be welcomed, particularly by business borrowers", Mr Cunliffe said.

"I can't judge the reasons for the action but I'm pleased that it has occurred and I note that other banks have also taken action to defend their positions in the last few days in the context of the banking inquiry hearings."

Shamubeel Eaqub, a senior economist with the New Zealand Institute for Economic Research, said that given how high overseas funding costs had been for banks during the global financial crisis, it was encouraging to see some easing and also that the relief was being passed on to consumers.

He expected other banks would follow suit.

"It is a competitive market and if one is seeing lower cost of funds then you would expect that is true for most of them. If that is genuinely the case, we would expect that to be reflected in interest rates by other banks too."

BNZ was the only one of the ASB's major rivals to respond to Weekend Herald questions by deadline and said it had cut its variable rate to 5.85 per cent last month.

It said it was continuing to monitor the market and review its rates.

Mr Eaqub also noted that the lower variable rates represented more heightened incentive to borrow for housing.

"That will concern the Reserve Bank. The fact that we've also had the housing market recovering from very weak levels to more normal levels suggests they'd be wary of cutting the OCR further."

Ms Matthews said the ASB's cut might have been made on the expectation that the Reserve Bank would cut the OCR from its current 2.5 per cent on Thursday next week.

ASB's economists are alone among those of the major banks in forecasting a cut.

FLOATING RATES

* ASB - 5.75 per cent
* Kiwibank - 5.79 per cent
* BNZ - 5.8 per cent