With interest rates high, and unemployment rising, people have been hesitant to borrow to buy property.
So, banks have been offering new customers attractive cash contributions, competing more on this than on interest rates.
Patten believed this approach was seeing them lose existing customers through the back door, as much as they were gaining new customers through the front door.
With high living costs putting household budgets under pressure, his observation was that borrowers were viewing these cash contributions (usually contingent on a borrower staying at a bank for at least three years) particularly favourably.
Another factor behind the record amount of switching is that a particularly large amount of debt has been coming up for renewal, as people have been fixing their loans at relatively short durations.
Indeed, borrowers have for some time been betting on interest rates falling this year.
In June last year, 52% of the country’s mortgage debt was due to be repriced within the following year. By June this year, this portion had risen to 64%.
If someone’s entire mortgage comes up for renewal at around the same time, it’s easier for them to switch banks. A borrower can’t shift part of their mortgage to a new bank and leave another part fixed for a longer duration at their old bank.
Patten said interest rates hadn’t fallen enough for people to really consider breaking their mortgage contracts – at a fee. Indeed, many borrowers still have loans fixed at Covid-era rates that are lower than what’s on offer now.
Patten noted break fees are usually higher in falling interest rate environments.
But because fee levels are linked to what banks pay to borrow money, they can fluctuate a lot day-to-day in line with movements in wholesale interest rates.
Patten recognised that the absence of publicly available break fee calculators, and banks’ aversion to publicly releasing the intricate algorithms they use to calculate break fees, made it hard for the average person to do their own math on whether it’s worth breaking their mortgage contract.
CoreLogic New Zealand head of research Nick Goodall’s assessment of the situation was similar to Patten’s.
While demand for mortgages is picking up, it’s been low, so banks are trying to grow by taking business off other banks.
The $1.75b worth of changes in loan provider in July accounted for 26% of all new mortgage lending during the month – a record high since at least 2017, and a percentage above the average over that time of 17%.
Goodall said banks were competitive enough to encourage people to switch but were still very profitable.
The Commerce Commission is of the view the banking sector isn’t competitive enough.
It believes competition would be improved if banks reduced the costs they impose on customers who switch banks, and provided more certainty around these costs.
In its final market study report, released last week, the commission said banks could pro-rate clawbacks for cash contributions. In other words, link the amount of cash contribution they have to repay the bank for leaving to the amount of time they had their mortgage at the bank.
The commission suggested a similar approach be taken to clawbacks for mortgage adviser commissions.
Brokers are paid commission by banks. If a borrower changes banks within a couple of years of taking out a mortgage, the bank will claw some of the commission back from the broker, who may pass some of the cost on to their client.
The Commerce Commission believed some clawback practices imposed unjustifiable costs on those looking to switch banks.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
