Kiwbank cuts home loan rate before OCR; is it ‘pure marketing’?

Tuesday, 8 October 2024

Many homeowners have been sticking to very short fixed rate home loans so they be able to soon lock in lower mortgage rates.

Kiwibank has stolen a march on other banks in announcing a 50 basis point cut in its floating loan rates, however some have dubbed the move “pure marketing”.

There’s broad consensus the Reserve Bank Te Pūtea Matua will cut the official cash rate (OCR) by 50 basis points tomorrow.

But Kiwibank has pre-empted the cut by saying it will drop its variable rate home loan to 7.75% from 8.25% from October 14 for new lending, and October 29 for existing loans.

Elliot Smith, the bank’s chief customer officer for business banking, said rates on variable rate business loans as well as home loan rates would be cut.

He said 35,000 Kiwibank customers would see their loan rates reduced as a result of the move, cutting their interest bills by $18 million on an annualised basis.

Banks have been maintaining their high variable loan rates, despite falling funding costs, which John Bolton, chief executive of Squirrel Mortgages, said had seen their margins increase.

Wellington’s home-building sector is facing a slump, with uncertainty around seismic building standards and a sharp post-pandemic fall in house prices contributing to the slowdown. Local authorities are being urged to address the concerns.

Data from the Reserve Bank indicates banks have edged down their variable mortgage rates for new mortgages to 8.45% in September from an average of 8.61% in May.

Kiwibank’s pre-OCR loan rate cut was “a first” for the market, Bolton said, but added: “It’s pure marketing.”

Banks generally waited for the Reserve Bank to send a clear signal by cutting the OCR, but Bolton said: “They don’t have to wait for the OCR to change to drop their rates.

“Banks actually price their variable home loans off the 90-day bank bill rate, not the OCR, and the bank bill rate has been dropping, and their margins have been increasing.”

Bolton said homeowners had been increasingly leaving their loans on variable rates, or opting for really short-term loan fixes, instead of locking in fixed rates for longer periods in expectation of rates dropping after the Reserve Bank cuts interest rates tomorrow, and then again later in the year.

“Almost the entire market has been going onto floating rates, and very short-term rates, in anticipation of rates falling,” Bolton said.

That’s shown in Reserve Bank figures which show that of the $266 billion in owner-occupier home loans, $100b was fixed for a period of six months or less at the end of August, which was $34b more than the same time last year.

The amount on floating rates was up by just over $1b over that period.

Kiwibank’s revolving credit home loan rate dropped to 7.8% from 8.3%. However, there’s one group of Kiwibank customers who will not see their variable rates fall – those with credit cards.

The bank’s personal credit card rates run from 9.95% on its low rate credit card to 20.95% on its Air NZ Airports Standard card.

But Smith said the bank was planning on temporarily dropping its business credit card rates for six months in November to help its small business customers get through Christmas.

Reserve Bank data shows at the end of July, banks were earning a higher rate on interest-bearing credit card debt than they were a year before.

Smith said: “Lowering rates quickly is crucial to provide much needed relief for borrowers, so it is important Kiwibank, and the market, responds.

“Many market commentators, including our Kiwibank Economics team, are calling for a 50- basis point (0.50%) cut to the OCR on Wednesday to support the economy.”

On Tuesday, Quotable Value said the average New Zealand home dropped in value by 1.6% in the September quarter, and its operations manager James Wilson said rates cuts may prompt a return of buyers to a market characterised by more sellers than buyers.

“There seems to be a spreading expectation that interest rates can only go one way, and so we’re seeing more people at open homes, in auction rooms, and browsing for property online.”

Despite the falls, the national average was still $901,920 at the end of September, and economists expect the residential property market to recover next year.

The data ,showed Wellington home values fell by twice the national average in the three months to the end of September - falling just over $20,500 lower than in the previous year, but beaten by Tauranga and Auckland, which saw falls of just over $30,000 and $56,500 respectively.