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Article in this morning's Sunday Times:
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Article in this morning's Sunday Times:
Why your mortgage rate must rise
SUNDAY , 08 AUGUST 2004
By ROB STOCK
Borrowers should brace themselves for their home-loan interest rates to rise faster than the official cash rate.
A bitter war for mortgage market share has left banks' margins on lending at historic lows, say banking commentators David Tripe and David Chaston. And the banks won't wear that for long.
That war raged in the early part of the year, led by BNZ, Kiwibank and Bank Direct, and was all the more intense as the banks faced up to a cooling housing market and credit boom.
James Munro, managing director of new mortgage market entrant SuperBank, says consumers benefited in the short term and banks' margins crumbled, but banks won't let that go on forever and pay-back time is coming.
Munro says: "These 25 point increases are getting passed straight onto customers, but those rises are going to get bigger in the next six months."
The first signs of this scenario unfolding have begun to appear in the market following the Reserve Bank's well-flagged decision to raise the official cash rate (OCR) from 5.75% to 6% on Thursday July 29.
ASB, the market leader in new business, moved its floating-rate loans up to 8.25% on August 5, shortly behind Westpac, which moved its floating rates from 8.1% to 8.35% on August 2.
ASB and Westpac have mortgage strategies based around quality service rather than aggressive pricing and therefore could be the first to move, says Chaston, of www.interest.co.nz.
SuperBank has moved up quickly, though BNZ, which had led the rates war, continues to wait. Kiwibank moved on Friday, and ANZ moved its fixed rates, but has so far held fire on floating.
Both are openly trying to maintain a reputation for being first to move loan rates down and last to move them up.
But rises in excess of OCR movements are inevitable across the board, Munro says, because if they don't: "There will be 10,000 people working in banking today who won't be in two years' time."
Economists expect at least one more rate rise from our pessimistic Reserve Bank. "Things are going to get worse for borrowers before they get better," Munro says.
Though consumers are being hit by higher loan rates and the prospect of worse to come, a study of the banks' rate card movements since the Reserve Bank lifted the OCR late last month shows that while they are quick to pass on rate rises for loans, they are dragging their feet on passing on the benefits of the rise to savings account holders.
As yet there has been precious little movement in rates paid on money in term deposit and savings accounts, says Chaston. That has brought accusations of "gouging" from some industry commentators.
Steven Anderson of Cannex, a ratings agency new to New Zealand, says: "Savings accounts are stickier business. People do not move their money if the rates do not move up for two, three weeks or a month."
That puts little pressure on the banks to respond quickly to rate rises. Chaston agrees, saying the banks did not "reward" such lazy money, and that rate rises could be weeks, or even months, in coming.
For individual savers the amounts of interest lost - or not earned - in such circumstances is too low in most cases to justify action. Munro says: "If your bank takes a month to move the rates up, are you going to move your account for the sake of 30c after tax?"
By close of business on Friday, only ANZ and SuperBank had moved deposit rates in term deposits and similar products. That may look bad but Tripe says studies conducted in New Zealand have shown that accusations of gouging are unfounded.
While banks are slower to pass on rises in interest rates to deposit customers, they are also slow to pass on drops in deposit rates when the OCR is falling, says Tripe. The Reserve Bank also says it has no evidence the banks are gouging customers by delaying rate rises for deposit accounts and term deposits which contain some $54.7 billion of retail money.
Much of that is in term deposits, in which rates are locked in until they mature.
SUNDAY , 08 AUGUST 2004
By ROB STOCK
Borrowers should brace themselves for their home-loan interest rates to rise faster than the official cash rate.
A bitter war for mortgage market share has left banks' margins on lending at historic lows, say banking commentators David Tripe and David Chaston. And the banks won't wear that for long.
That war raged in the early part of the year, led by BNZ, Kiwibank and Bank Direct, and was all the more intense as the banks faced up to a cooling housing market and credit boom.
James Munro, managing director of new mortgage market entrant SuperBank, says consumers benefited in the short term and banks' margins crumbled, but banks won't let that go on forever and pay-back time is coming.
Munro says: "These 25 point increases are getting passed straight onto customers, but those rises are going to get bigger in the next six months."
The first signs of this scenario unfolding have begun to appear in the market following the Reserve Bank's well-flagged decision to raise the official cash rate (OCR) from 5.75% to 6% on Thursday July 29.
ASB, the market leader in new business, moved its floating-rate loans up to 8.25% on August 5, shortly behind Westpac, which moved its floating rates from 8.1% to 8.35% on August 2.
ASB and Westpac have mortgage strategies based around quality service rather than aggressive pricing and therefore could be the first to move, says Chaston, of www.interest.co.nz.
SuperBank has moved up quickly, though BNZ, which had led the rates war, continues to wait. Kiwibank moved on Friday, and ANZ moved its fixed rates, but has so far held fire on floating.
Both are openly trying to maintain a reputation for being first to move loan rates down and last to move them up.
But rises in excess of OCR movements are inevitable across the board, Munro says, because if they don't: "There will be 10,000 people working in banking today who won't be in two years' time."
Economists expect at least one more rate rise from our pessimistic Reserve Bank. "Things are going to get worse for borrowers before they get better," Munro says.
Though consumers are being hit by higher loan rates and the prospect of worse to come, a study of the banks' rate card movements since the Reserve Bank lifted the OCR late last month shows that while they are quick to pass on rate rises for loans, they are dragging their feet on passing on the benefits of the rise to savings account holders.
As yet there has been precious little movement in rates paid on money in term deposit and savings accounts, says Chaston. That has brought accusations of "gouging" from some industry commentators.
Steven Anderson of Cannex, a ratings agency new to New Zealand, says: "Savings accounts are stickier business. People do not move their money if the rates do not move up for two, three weeks or a month."
That puts little pressure on the banks to respond quickly to rate rises. Chaston agrees, saying the banks did not "reward" such lazy money, and that rate rises could be weeks, or even months, in coming.
For individual savers the amounts of interest lost - or not earned - in such circumstances is too low in most cases to justify action. Munro says: "If your bank takes a month to move the rates up, are you going to move your account for the sake of 30c after tax?"
By close of business on Friday, only ANZ and SuperBank had moved deposit rates in term deposits and similar products. That may look bad but Tripe says studies conducted in New Zealand have shown that accusations of gouging are unfounded.
While banks are slower to pass on rises in interest rates to deposit customers, they are also slow to pass on drops in deposit rates when the OCR is falling, says Tripe. The Reserve Bank also says it has no evidence the banks are gouging customers by delaying rate rises for deposit accounts and term deposits which contain some $54.7 billion of retail money.
Much of that is in term deposits, in which rates are locked in until they mature.
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