Here's how to put bank competition to work for you

Friday, 8 February 2019

Reserve Bank plans to require banks to hold more capital could push up borrowing costs.

Homeowners have another chance to cash in on bank competition to pay off their mortgages faster.

Westpac and HSBC are now offering a 3.95 per cent home loan rate to qualifying borrowers - Westpac's deal is for one year and HSBC's for three.

The rates are as low as any that have been offered in the New Zealand market.

There are some catches: Westpac's deal requires borrowers to have at least 20 per cent equity and their income credited to a Westpac account. HSBC's requires a home loan of at least $500,000 or $100,000 in savings with the bank.

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But taking advantage of the rate should pay off.

If you switched from the current market median three-year rate of 4.89 per cent to the 3.95 per cent rate, you could reduce fortnightly payments on a $500,000 mortgage from $1334 to $1211.

A lower mortgage rate means more cash in your pocket - or getting debt-free faster.

If you switched the rate and kept the repayments the same (and were able to maintain that interest rate difference for the life of the mortgage), you'd knock off the mortgage three years earlier and save more than $125,000 in interest.

Of course, rates are likely to move over the decades that most people have a home loan but any extra you pay off when interest rates are low reduces the impact of rate rises in future.

ASB economist Jane Turner said she expected a 100 basis point increase in retail borrowing rates from now until a peak in 2022.

That would mean the median 4.89 per cent rate would turn into 5.89 per cent.

'However, if economic growth, wage growth and inflation pressures continue to underperform expectations, it is possible retail borrowing rates won't rise quite so high or possibly peak later.'

She said proposed changes from the Reserve Bank that would require banks to hold more capital would increase the cost of borrowing.

'The main implication of these changes is that the cost of funds for banks will increase and we expect that banks will pass on a portion of the higher cost of funds. Equity capital is the most expensive form of banks' funding. We expect higher minimum capital requirements will directly increase bank funding costs by at least 50 basis points. This is at the conservative end of our estimates and a large range of uncertainties remain.'

But economist Cameron Bagrie, of Bagrie Economics, said he expected little change in interest rates.

'We may see a change in the mix with higher bank margins offset by a lower official cash rate. [It's] all very dependent on inflation remaining tame. I can't see growth being strong enough to drive inflation up but do worry about the amount of cost pressures. The scale is difficult for some sectors to absorb so we're seeing inflation slowly rise while growth is slowing.'