Banks in stand off over home loan increases

Banks are in a stand off at the moment seeing who will blink first and raise their home loan rates.

Wednesday, June 16th 2010, 6:55PM

Last week the Reserve Bank started its tightening cycle and increased the official cash rate by 25 basis points to 2.75%.

Normally floating home loan rates move in lock step with OCR changes, but not this time. understands the banks are ready to go with increases but no one wants to be first.

They have all seen how much negative press the Australian banks took when they started increasing rates.

At the moment New Zealand banks have a little bit of wiggle room as their margins on short term loans are at historically high levels.

Currently the margins on one year home loan rates are around 160 to 170 basis points. During the height of the mortgage wars several years ago the margin was less than half that at 70 points.

However, while the margin is big at the moment it is slowly being eroded.

The other factor which is playing in banks' favour is that the housing market is weak and there is neither a huge demand for credit, nor is there a lot of competition for home loan business.

These margins have created a complete about face with how banks operate. Previously they competed fiercely for home loan business and made lower margins, and supported that business through the profitability on term deposit lending.

Now the TD market is super competitive, and it is being "subsidised" by the home loan operations.

When rates come expect banks to make changes which will keep them below certain price points; for instance a 5.99% is more likely than something over 6% for a floating rate.

This means the 25 point OCR increase is unlikely to be passed on in full.


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