Home-loan battle here to stay, says BNZ

Competition between banks on home-loan interest rates will be an ongoing feature of a market reshaped by the rise in popularity of fixed-term loans, says Bank of New Zealand.

A fresh bout of price competition has seen two-year mortgage rates cut to below 8 per cent in recent weeks as the major banks tussle for up to $15 billion worth of two-year mortgage business written during the height of the 2004-2005 mortgage war. Those loans are now due for renegotiation.

Recent falls in interest rates on international money markets where banks source many of the funds they lend to New Zealand home buyers have given the banks room to trim their rates.

But the first and subsequent bouts of competition have seen the banks suffer pressure on their bottom lines as the margins between what they pay for funds and what they receive from borrowers have been eroded.

As a result, several commentators and even one or two banks have questioned how long the rates now on offer can be sustained.

But the BNZ personal financial services general manager, Blair Vernon, believes rates on the international money markets are likely to continue at current levels for some time.

"That means that fixed rates are going to be around this level for a while. Whether that means they're sustainable could be a different thing.

"That really depends on how one's organised to deal with the distribution," he said.

BNZ believes it can stand lower margins than its rivals because it does not give a cut to mortgage brokers.

Vernon also believed the rise in popularity of fixed-term mortgages, especially in the two-year category, had "reshaped the market".

"Somewhere between 30 and 40 per cent of the stock of home loans are going to mature every year.

"I'm of the view there's going to be an ongoing competitive challenge.

"I don't think this is about having a spring campaign and then going back to business as usual. I think this is more like business as usual."

Meanwhile, Westpac, which stayed on the sidelines during 2004-2005, has thrown its hat in the ring after admitting a couple of months ago that its market share had suffered under its non-combatant strategy.

"We have learned our lesson from 2004," said Westpac's senior product manager for housing, Mike Davy.

"We were in the game in terms of writing most of our business on an 18-month term when others were fighting in two-year [terms] but I think we held back too long before we joined the market.

"This time around we have a very deliberate stance that we will not lead, but we will not be left behind either."

But he didn't think tighter margins were sustainable in the long term.

"I hope the industry would have learned its lessons from 2004 ... but by driving rates down again they're just lengthening the amount of time that the thin margins stay in the industry.

"It might be good for the customer over the short term, but it's not good for the industry."

David Chaston, publisher of website interest.co.nz believes the recent moves are unsustainable for the banks and are unlikely to last for long.

He said the general trend was for rates to rise on international money markets and said banks were feeling the pinch from lower lending margins.

"With some now starting to report lower net results than last year, it will not be long before chief executives and shareholders demand an end to margin erosion."

Chaston also said New Zealand banks might soon face higher borrowing costs as international investors became concerned about the country's economic health.

International rating agency Standard & Poors regularly sounds warnings that New Zealand's deteriorating current account deficit may lead it to review the country's credit rating.

"Higher international rates, a shift back towards normal lending margins, and a rising risk premium all may come together before the end of 2006 to deliver sharply higher mortgage rates," said Chaston.

"We recommend you act sooner rather than later to lock in the rates for your mortgage."

Loan lessons

* The BNZ says its current two-year fixed-mortgage rates will last for some time and the "mortgage war" is here to stay.

* But commentators and some rivals including Westpac say the reduced profitability of current rates means they are unsustainable.

* David Chaston of interest.co.nz says higher international interest rates, a shift back towards normal lending margins and other factors could mean sharply higher mortgage rates before the end of the year.