Homeowners underestimating scale of home loan rate rises to come

Tuesday, 2 November 2021

Hardworking ANZ staff had already received a bonus earlier in the year.

Home loans are rapidly getting more expensive as the main banks push up their mortgage rates, and seek to rebuild their lending margins.

ANZ has lifted its one-year “special” home loan rate for people with 20 per cent or more equity to 3.34 per cent, and its two-year fixed rate to 3.99 per cent.

Kiwibank has also moved its home loan rates up, with its one-year special rate moving to 3.49 per cent, and its two-year rate moving to 3.99 per cent.

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Independent economist Tony Alexander said he expected rates to “ go quite a bit higher”.

“I think people are underestimating quite a few things,” he said.

“They are underestimating the degree of inflationary pressure in the economy, which the Reserve Bank will need to respond to, and they are underestimating the eventual reserve Bank response.

“The Reserve Bank have lost a credibility for fighting inflation. Only six months ago they predicted inflation right now would be 2.5 per cent. It’s 4.9 per cent. That’s a horrendous error,” Alexander said.

The Reserve Bank Te Pūtea Matua may need to lift the official cash rate (OCR) higher than households expect, he said.

High house prices had produced enormous wealth gains for many households, which would make the Reserve Bank’s task harder by taking the sting out of higher borrowing rates for many households, he said.

Banks’ cost of borrowing had gone up as wholesale investors responded to high inflation, and that was forcing banks to crank up their home loan rates, Alexander said.

As well as ANZ and Kiwibank, other banks that have lifted rates in recent days include SBS, the Co-operative Bank, Westpac and ASB.

Many shorter-term home loan rates remain slightly below their pre-Covid levels, data from the Reserve Bank shows.

Late last year, Westpac could advertise home loan rates that were ‘crazy low’. Now things are different, with many households locking their home loans in for three years as they brace for further rate rises.

In September 2019 the average “special” one-year rate was 3.52 per cent.

The average two-year “special” rate at the time was 3.44 per cent, which is lower than all but a handful of less-used banks.

The Reserve Bank data shows the average standard rate loan for borrowers with less than 20 per cent equity for one and two-year fixed rate periods was 4.43 and 4.48 per cent.

ANZ, the country’s largest mortgage lender, has raised its one- and two-year standard rates to 3.94 per cent and 4.59 per cent respectively.

Banks’ little-used four and five-year fixed rates are already above their pre-Covid levels.

In September 2019, the average floating rate loan was 5.45 per cent, Reserve Bank data shows.

ANZ is charging 4.59 per cent for its floating rate, while ASB is charging 4.45per cent, and Westpac is charging 4.84 per cent.

Alexander said all the main lenders had lifted their lending rates in response to recent sharp increases in wholesale borrowing costs.

“Those wholesale interest rates have gone up to reflect rising rates offshore as worries about inflation grow,” he said.

“At the moment, if I personally were a borrower, I’d probably fix three years,” he said.

Banks margins over their cost of funds remained lower than pre-Covid and the banks would be keen to increase them, Alexander said.

“Banks will use the fog of confusion surrounding OCR moves to rebuild these margins over time.

“That’s what any normal business would do. If you have got depressed margins, you want to rebuild them.”

Kiwibank economists expect the next move at the November monetary policy statement to be a 25 basis point rate hike to 0.75 per cent. They see the cash rate at 1 per cent by February 2022 and at 2 per cent by the end of next year.

The next monetary policy announcement is on November 24.

The Reserve Bank's remit requires it to keep inflation between 1 and 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 per cent target midpoint and supporting maximum sustainable employment.

CORRECTION: An earlier version of this story said Kiwibank economists expected the Reserve Bank's next move would be to hike the OCR to be 50 basis points taking it to 1 per cent from 0.5 per cent.