Approximately 50% of mortgages are due for refixing over the next 12 months, says CoreLogic. Many borrowers are in for a rude shock as they switch from Covid-era record low-rate deals to 6 and 7 percent home loans. Some will ask: Why can’t banks in New Zealand offer the stability of a US-style 30-year fixed-rate home loan?
Borrowers in the US can lock in a 15-year fixed-rate home loan from Wells Fargo at an interest rate of 5.6%. They also benefit from legislation that enables borrowers to reset their ‘fixed’ mortgage rate at a lower rate in the event their bank cuts the rate available to new borrowers.
The standard US ‘fixed’ loan is perhaps a misnomer and could be more accurately described as a capped loan, with the added reassurance of knowing that the interest rate can only go down.
The longest fixed rate offered in New Zealand at the time of writing was Westpac’s five-year loan for 5.99% (20% minimum deposit).
It’s all in the funding
US banks can issue long-term fixed mortgages because they use a different funding model.
Long-term lending is funded by short-term borrowing, which is generally regarded as quite safe, because long-term debt interest rates are higher than short-term debt rates, producing a positively sloped yield curve.
New Zealand banks tried this approach and it ended badly.
In 1990 the Crown rescued the Bank of New Zealand (BNZ) by supporting a Fay Richwhite proposal to ringfence the bank’s bad debts into a separate company, costing $720 million, with the Crown supplying $620 million and Fay Richwhite $100 million. The bank was later sold to National Australia Bank (NAB).
Since then, New Zealand banks have matched borrowing and lending. So, when a bank lends to a customer at a fixed rate for three years it borrows at a fixed rate for the same period, all but eliminating risk.
US banks further protect their exposure by securitising loans (package and sell to investors), passing risk from themselves to investors.
The dearth of borrowing options has prompted calls for the Commerce Commission to investigate major lenders in a move to inject competition.
Loan break fees should be outlawed, some say. However, banks argue that break fees are simply a mechanism to compensate for interest they would have been paid under the fixed-term contract. Some commentators rubbish these claims, describing break fees as “double dipping”, as banks re-lend the loan they’ve collected.
We can’t help you with lending, but we’re happy to help you do the numbers on rental return. Contact a Goodwins property manager on 0800 GOODWINS.