Predictions of early increases to mortgage rates this year may be the result of lenders seeking to increase profit margins rather than reaction to economic conditions says a leading Auckland mortgage broking company.
Loan Plan director, Chris Barnao, believes cut-throat competition between lenders last year to obtain share in a highly lucrative $70 billion plus marketplace, led to many decreasing their profit margins to attract new business.
"The traditional basis indicator for rates is the Official Cash Rate (OCR) set by the Reserve Bank with most floating rates sitting around 1.5 - 2% above it. In fact only floating mortgages are set against the 90-day bank bill rate, with fixed rates funded from longer term money which leads to lenders being able to offer a wide range of product and terms," he says.
"Last year in a slowing domestic housing market and with the decreasing OCR as the Reserve Bank followed overseas trends, lenders had the opportunity to slash rates to their lowest levels in more than 30 years."
However with money market interest rates at their present levels, there was little margin for profit for lenders offering very low rates.
"Some fixed mortgages, with rates as low as 4.99% for a six month period, can best be described as "honeymoon" product. While on the face of it these types of loans are very attractive, they do incur an additional application fee. They are designed quite simply to attract and capture new customers - nonetheless they offer very little margin for the lender."
In his monetary policy statement of January 23, Reserve Bank governor Don Brash did not rule out changes to the OCR later in the year.
"However, we believe while there continues to be risk of further slowdown in the world economy, a currently buoyant local housing market and high level of consumer spending should not provide adequate inflationary pressure to make the Reserve Bank increase rates before September," Barnao says.
While it appears New Zealand is currently at the bottom of the floating rate cycle, he considers lenders who have already moved up their fixed rates are responding more to a desire to increase their own profitability.
"With the housing market reporting the best sales for December since 1998, lenders are busy and probably no longer feel the need to heavily discount mortgages."
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Chris Barnao is a director of Loan Plan.
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