Home loan report: Relative calm restored for now

Relative calm has been restored by reductions in the cost to lenders of wholesale funds over the past couple of weeks. This reflects a little less pessimism in financial markets over the economic picture in the US and also the increasing conviction that cuts are in sight for New Zealand’s official rate.

But none of this necessarily means that there will not be further increases in mortgage rates as individual lenders grapple with the pressures placed on them by the methods they use to fund their loans.

Ian Park, head of retail banking at ASB said that longer term fixed rates might come under further pressure but “a the short end we are probably about there”.

Longer term fixed rates are funded mainly from international institutions which are seeking higher margins on their lending than they were before credit conditions tightened in the second half of last year.

Some large rate gaps have opened up between lenders although some of the lower rates may not remain at current levels. AXA, for example, which shares the lowest rate over two years with Credit Union Baywide, at 9.25%, says its rate is under review. The rate is also restricted to loans of up to 80% of property value. By contrast the highest rate over two years is 10.55% from market newcomer NZMFG Home Loans.  Over five years the range is from 8.95% from AXA, Housing Corp and Silver Fern to 10.8% from Pioneer and Pacific on their “Swift” products.

Mainstream banks are tending to sit in the middle-ground and believe that they are in a good position because they draw funds from a variety of sources, including retail cash deposits, rather than one or two overseas lenders.

It seems likely that the borrowers who will be hit hardest by the rise in mortgage costs are those with histories of arrears, the self employed and others who fall into the general category of “non conforming”. Some of the highest rates in the market now are being charged by lenders who tend to cater for this group and specialist lender Bluestone has effectively suspended indefinitely its lending in New Zealand.

As for rate strategies, ASB’s most recent report on loan rates says that fixing for one to two years is appealing but depends on a borrower’s ability to cope with higher rates should current conditions persist. Westpac recommends hedging risk by splitting the mortgage into a mix of different maturity terms, perhaps with a heavier weighting around two to three years. “With floating rates now firmly into double digits, waiting and seeing is an expensive option."

ANZ and National Bank have meanwhile, confirmed a range of changes to their official lending criteria, including a requirement for a low equity charge on all new loans where the mortgage is 80% or more of the property’s value. The sister banks say they will be “very cautious” in lending at more than 90% and the maximum will be 80% on low-documentation loans.

In the case of property investors, the size and complexity of portfolios, locations of the properties, tenancy rates, and the level of industry experience all have a bearing on applications, say ANZ and National but  “in the current property market, we will be expecting residential property investors to provide a deposit of at least 10% of the property's value”.