KEY POINTS:
Kiwibank has dismissed the suggestion its new 8.99 percent mortgage rate is a loss leader.
The state-owned bank ambushed the market this morning by dropping its two-year fixed rate point-three of a per cent. It is the first time the two-year rate has been under nine per cent
in six months.
Chief executive Sam Knowles says the lower rate is viable, and the bank does not indulge in loss-leading. He says they are a commercial organisation and can make a reasonable profit at the rate.
Knowles expects the rate will go even lower before the end of the year, but will not speculate on when that might be.
Kiwibank is the first bank to offer a sub-9 per cent 2 year mortgage rate since mid November. The move signals that the 2 year mortgage rate appeared to have peaked in April at around 9.7 per cent and is now headed lower in line with lower wholesale interest rates globally.
Easing fears about the sub-prime crisis and the resulting credit crunch are pushing interest rates lower globally and that is now being passed on to New Zealand consumers.
The news will come as a great relief for homeowners and property investors set to roll over nearly NZ$40 billion worth of fixed rate mortgages before the end of the year.
Many will still face higher interest rates than the ones that were set 2 years ago, when the 2 year fixed rate mortgage was around 8 per cent, but fears of a 10 per cent-plus rate are now receding. A chart showing the average bank 2 year fixed mortgage rate is visible above on the left.
Kiwibank's rate is now clearly the lowest among the banks, with ASB, ANZ, Westpac and National all offering 9.4 per cent for their two year mortgage rate. They all cut their rate from 9.7 per cent to 9.4 per cent in the last week, also in response to lower wholesale interest rates. BNZ offers 9.29 per cent to customers who buy other bank products.
Weak labour force and retail sales figures in the last week have reinforced economists' expectations that the Reserve Bank will be able to cut the Official Cash Rate (OCR), currently at 8.25 per cent, sooner rather than later. Most are still predicting a September cut in the official rate, although chances of a June or July cut are increasing.
However the impact of an OCR cut will not be as widespread or as immediate as falling fixed mortgage rates, given 90 per cent of mortgages are fixed rate mortgages rather than variable rate mortgages, which are more closely linked to the OCR.
The Kiwibank rate of 8.99 per cent only applies to home buyers borrowing 80 per cent or less than the home's value. Kiwibank also cut its one year fixed rate to 9.45 per cent from 9.9 per cent.
- NEWSTALK ZB, INTEREST.CO.NZ