Mortgage rate war 'unsustainable'

Tight margins and a decelerating property market have brought an end to the big banks offering "unsustainable" competitive two-year fixed mortgage rates, Deutsche Bank says.

Four of the banks -- ASB, BNZ, ANZ and National -- have bumped up their two-year fixed home loan rates, either today or on Friday.

BNZ and National Bank have lifted their two-year fixed rates to 7.6 per cent, while ASB Bank and ANZ are offering 7.7 per cent.

Westpac's two-year fixed rate remained stable at 7.4 per cent.

Deutsche Bank chief economist Ulf Schoefisch said it was always obvious that the discounted rates, which were about the 7.0 per cent mark -- some as low at 6.95 per cent -- were unsustainable in the long term.

"The margins were wafer thin and those banks that were paying broker fees didn't really make any money," Dr Schoefisch told NZPA today.

"We are now in the Christmas period and the mortgage business is drying up anyhow," he said.

Another factor was the waning property market, which has driven the domestic economy along at break-neck speeds for the past two years.

"What happened is that a lot of people got onto very favourable one year fixed rates and they were all expiring over the past few months so the banks wanted to renew those mortgages," he said.

"I'm not sure whether they (the banks) have gained market share or not."

Dr Schoefisch did not believe that the Reserve Bank's December 9 monetary policy statement (MPS) had any bearing on the banks' moves to raise rates.

"The banks had already decided that this had to end, the BNZ had put out a date (December 17), and it was foreseeable that the others would follow," he said.

At the December MPS, Reserve Bank governor Alan Bollard put a shot across the bows of the mortgage market.

He warned that further rises in the official cash rate -- currently at 6.5 per cent -- could not be ruled out next year, dashing earlier expectations that it might dip towards the middle of next year.

Dr Bollard said that if banks increased their profit margins to more normal levels and global interest rates rose more than expected, the lowest rates in the market "would rise toward 8.5 per cent by the end of 2005".

Dr Schoefisch said it was likely that the Reserve Bank saw the heightened competition in the two-year fixed home loan market as temporary.

"That's why it didn't get too upset by this. They going into the New Year knowing that the rates are higher and it will start to bite," he said.

"People will pay more to the banks and less on retail goods."

Meanwhile, on Wednesday, the September quarter gross domestic product figures are out and economists are picking growth to have slowed to 0.6 per cent from the June quarter.

- NZPA