It has been more than a year since we last looked at the difference between the home loan rates Kiwis pay compared to those in Australia.
Over that period, the somewhat unusual advantage Kiwi home loan borrowers had over their Aussie counterparts has switch back to a small disadvantage. It is a disadvantage that magnifies the longer the term of the interest rate fixed contract.
The most striking thing about the changes over the past eighteen months is that the Aussie rates are very similar whereas the Kiwi rates have risen sharply. None of this is ‘news’ to Kiwi borrowers, but it is now accentuating the differences between the two countries.
This Kiwi rise doesn’t seem to be coming from a rise in margins, the key margin being the difference between wholesale rates and retail rates. In both countries the margins to swap have decreased over this longish period, even as rates have moved up here. They seem to have in Australia as well, although the movements there are actually quite small.
The mortgage markets in each country are quite different. The New Zealand market is 80%+ based on fixed rate contracts. The Australian mortgage market is similarly dominated by floating rate arrangements.
But it is more complicated than that. Our mortgage contracts are relatively simple affairs; you borrow over the term at a specified interest rate.
However in Australia, the stated interest rate is just the start. There are bundle and package fees, and related ‘discounts’, to complicate matters. Their regulators require banks to publish a Comparison Rate to expose the true costs involved. And 80% of all Aussie home loans are wrapped up around these opaque bundle arrangements.
We have been tracking a New Zealand – vs – Australia mortgage comparison for more than five years now, publishing the shifting penalty that Kiwi home owners pay compared to Australians. We last did that eighteen months ago.
Here is the current comparison in the way we have done it consistently since 2015:
Residential mortgage interest rates
|December 31, 2021, <80% LVR||Floating||1 year||2 years||3 years||4 years||5 years|
|margin to swap||3.75||1.92||2.08||2.23||2.46||2.62|
|CBA (ASB’s parent) **||4.70||4.52||4.39||4.36||4.34||4.36|
|NAB (BNZ’s parent) **||3.49||4.20||4.11||4.12||4.11||4.19|
|margin to swap||3.59||3.35||2.78||2.40||2.78||2.16|
|* 90 day bank bill rate|
|** these are discount package rates that come with big annual fees|
|differential in May-20||0.86||-1.11||-0.91||-0.34||-0.33||-0.15|
|differential in May-19||0.39||-0.14||0.00||0.07||0.09||0.30|
|differential in Nov-18||0.67||-0.12||0.21||0.35||0.79||1.05|
|differential in Nov-17||0.89||0.55||0.64||0.90||1.33||1.39|
|differential in Jan-17||0.28||0.13||0.59||0.86||0.89||0.94|
|differential in Aug-15||0.69||0.26||0.16||0.56||0.78||0.83|
|differential in Feb-15||1.02||1.06||0.92||1.00||1.01||1.11|
Despite rising New Zealand rates, we still are matching Australia’s one year fixed home loan rate offers. But that is solely because challengers like HSBC and Suncorp are reducing their average. For the main banks we have significant advantages here for that one year term, and are more or less even for the two year term.
So, our recent benchmark rate rises only take up back to ‘average’ Australian levels.
The real commercial reason home loan pricing doesn’t reduce in Australia is that the Aussie operations are cost-heavy. Taking ANZ as an example, they report a group NIM (net interest margin) of just 1.6% whereas the New Zealand ANZ operations were still achieving 2.0%. So despite charging higher effective rates to customers of the largest component of their loan book (mortgages), the Aussie bank ended up with a smaller NIM.
Wholesale money is needed to balance the duration matching requirements.
|December 31, 2021||Floating||1 year||2 years||3 years||4 years||5 years|
|NZ margin to swap||+3.75||+1.92||+2.08||+2.23||+2.46||+2.62|
|AU margin to swap||+3.59||+3.20||+2.65||+2.28||+2.63||+2.07|
|and this compares with the levels in May 2020 as follows …|
|NZ margin to swap||+4.23||+2.50||+2.51||+2.84||+3.08||+3.09|
|AU margin to swap||+3.49||+3.69||+3.44||+3.17||+3.35||+3.15|
|and this compares with the levels in May 2019 …|
|NZ margin to swap||+4.08||+2.39||+2.47||+2.54||+2.90||+2.94|
|AU margin to swap||+3.94||+2.78||+2.75||+2.75||+2.99||+2.82|
|and compares with the levels in November 2018 …|
|NZ margin to swap||+3.86||+1.93||+2.04||+2.20||+2.71||+2.69|
|AU margin to swap||+3.19||+2.05||+1.83||+1.85||+1.92||+1.63|
|and compares with the levels in November 2017 …|
|NZ margin to swap||+3.93||+2.51||+2.42||+2.59||+3.14||+3.08|
|AU margin to swap||+3.28||+2.21||+2.08||+2.03||+2.05||+1.98|
Overall, margins to swap are tightening in both countries and have been for about two years. As rates reduced, that limited the practical options banks have to ‘maintain’ their net interest margins. But in rising markets, they have more options. And the combination of the recent CCCFA restrictions, and other official measures to restrain house price growth, banks may be dealing with less business in 2022, so seeing margins grow may be a way they can keep their financial results from backsliding. Getting margins back to what they had in 2017 to early 2020 would do that.