Why do Aussies get cheaper mortgage rates than New Zealanders?

Monday, 19 November 2018

They're owned (mostly) by the same people. So why do banks in Australia charge their home loan borrowers less than we pay here?

The average one-year rate being advertised by the seven big New Zealand banks was this week 3.98 per cent - fractionally below Australia's 4.03 per cent. 

That's made news because it's unusual - Australian rates are generally noticeably below those charged on this side of the Tasman.

Across all other terms, Australian borrowers were still getting cheaper rates. On an average basis, New Zealanders were offered 4.52 per cent on three-year terms, compared to 4.04 per cent in Australia.

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In Australia, ANZ has two-year rates for 3.75 per cent compared to a special of 4.29 per cent in New Zealand.

Westpac has 4.09 per cent in Australia and shares the 4.29 per cent special rate here.

Official cash rate

John Kensington, a partner at KPMG specialising in financial services, said a key driver in the difference was the official cash rate in each country. in Australia it is at 1.5 per cent, compared to 1.75 per cent here.

Mieke Welvaert, an economist at Infometrics, said that difference had held historically - Australia was generally 25bps below New Zealand.

That means banks are starting from a lower rate when they set what borrowers should pay.

Economist Cameron Bagrie said the Australian Reserve Bank had generally had to do less to rein in the economy there.

'We've preferred to consumer today as opposed to save for tomorrow so interest rates had to be lifted higher to dampen our enthusiasm to consume.'

Economy

Banks obtain a significant amount of the money they lend from overseas sources.

Welvaert said there would be a risk premium attached to that. Banks in New Zealand seeking overseas funding would have to pitch themselves against Australia as an appealing place to place money.

If those funders considered that New Zealand was a riskier economy, they would want a higher return.

Some of their money also comes from locals depositing their money - the cost of this depends on how much they must pay to convince those people and organisations to put their money in the bank rather than anywhere else.

'Because Australia has a bigger economy, it's generally cheaper to raise funds there,' said NZ Bankers Association acting chief executive Antony Buick-Constable.

Borrower habits

Economist Cameron Bagrie said Australians had a preference for floating over fixed rates, so there was more competitive pressure on floating rates and less on fixed.

The Australian average floating is less than 5.2 per cent, compared to 5.89 per cent in New Zealand.

'New Zealanders tend to like a little bit of certainty so we see more competition for one- and two-year rates.'

David Tripe, head of Massey University's school of economics and finance, pointed to banks' yield curve as another reason for the difference.

In New Zealand, rates get more expensive the longer you want to fix for. But in Australia, five-year rates are cheaper than a three-year fix on average.

Buick-Constable said about 80 per cent of the Australian market was floating, whereas in New Zealand 80 per cent was fixed.

Will they drop further?

Kensington said he could see little scope for New Zealand mortgage rates to drop further. With a bank margin of about 2 per cent on lending, there was barely any space to move, he said.

Bagrie said he did not expect the rates below 4 per cent to continue, unless there was a major global incident.

'There looks to be a lot of building inflation pressures and while the Reserve Bank is scotching talk of higher rates, as inflation build, so too will pressure for rates to move up.  

'The price of borrowing is less of an issue now anyway. It's about the supply of credit and the game has changed on that front.  It's going to get tougher.  It's already happening in Australia and it's impacting the property market.  New Zealand is seeing a slight tightening but the risk is the fallout from Australia filters over here.'