Fixed-term borrowers only get fraction of official cash rate cut

Wednesday, 7 August 2019

Banks have moved to cut their mortgage rates after a reduction in the official cash rate, but not all borrowers will benefit.

The official cash rate has been cut by 50 basis points, to 1 per cent, a record low.

ASB, Kiwibank, ANZ and BNZ have implemented a retail interest rate cut as a result.

ASB passed on the full rate cut to its floating home loan rate, taking it to 5.2 per cent, and 45 basis points of it to its revolving credit rate, taking it to 5.3 per cent.

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BNZ, ANZ and Kiwibank also applied the full cut to their floating rates, taking them to 5.3 per cent, 5.15 per cent and 5.19 per cent, respectively.

Westpac cut its floating rate by 45 basis points to 5.34 per cent.

But ASB and BNZ only applied a reduction of four basis points to their two-year rates, taking them to 3.75 per cent. Kiwibank, Westpac and ANZ did not move fixed rates.

The official cash rate has been reduced by a larger amount than many people expected.

More than 83 per cent of New Zealand mortgage lending is now on fixed terms. One- and two-year rates are the most popular.

ASB chief economist Nick Tuffley said the reduction was about what he would expect.

He said fixed rates were priced off wholesale swap rates, which had already been pricing in a 1 per cent official cash rate, anyway.

'These fixed rates are already well ahead of where the official cash rate has been. There's been a huge amount of anticipation of the official cash rate coming down.'

He said, even though it was a bigger cut than some had expected, it still took the rate to where it had been expected to be by the end of the year.

Gareth Kiernan, chief forecaster at Infometrics, said that, in 2016, virtually none of the official cash rate cuts were passed on to borrowers.

'There might be a different dynamic at play now compared with three years ago, when the Reserve Bank was cutting rates at the same time as other central banks were tightening, whereas now other central banks are easing as well – meaning that the international component of banks' funding costs is likely to be getting cheaper, and providing scope for a greater proportion of the official cash rate's reduction to be passed on than was the case in 2016.

'Nevertheless, I note that ASB hasn't cut its deposit rates by as much as its floating mortgage rate, which implies that their overall margins will be squeezed by the cut they've announced in floating mortgage rates. How much other banks follow suit will depend on their appetite for having their profits put under some pressure.'

ASB reduced its Savings on Call rate by five basis points.

What does the official cash rate mean?

ANZ said it was 'cautiously reviewing' deposit rates. Acting managing director of retail and business banking Ben Kelleher said it was concerned about the impact on savers.

'Given how low interest rates now are, a drop in deposit rates is likely to have a bigger impact on elderly savers than a drop in lending rates on home owners.'

Westpac cut its Bonus Saver and Bonus Saver PIE rates by 40 basis points to 1.35 per cent. Its 32-day Notice Saver rate will drop by the same margin, to 2 per cent.

But Jose George, Canstar's general manager in New Zealand said more cuts should come.

'The extent of the cut is certainly a surprise and it is generally good news for borrowers. Banks would have built in expectations of a 25 basis point cut, and another one later in the year - not such a big cut now.

'Home loan rates are already being cut by some banks and we would expect others to follow suit. It is certainly a good time for borrowers to consider if their mortgages are structured to take advantage of this cut, and look at other options if not.'

Brokers said the drop in floating rates could have a wider effect, even if few borrowers were actually paying those rates.

Some banks judge a client's ability to service a mortgage based on their current floating rate plus a margin.

Broker Glen McLeod said, if the reduction prompted banks to reassess what that servicing rate should be, more people might qualify for more lending.