New Zealand, one of the most successful economies to flatten the curve, is shaping up, being virus free for around three weeks now.
Banks have shunned down rates to historical lows - providing value to customers.
Lower borrowing rates are likely to offer additional ease to financial concerns, while it is making the housing market highly competitive.
According to a recent report published by Fitch Ratings, New Zealand's NZD 271 billion residential mortgage market has specified unique loan characteristics and macro-prudential measures that underpin the sound performance of the overall housing market.
With a mix of housing types, from standalone buildings on a block of land to attached townhouses and apartments, New Zealand offers it all. Moreover, the process for buying a property is extremely organised and well-regulated to ensure a fair process for each side involved. Besides, all major banks offer home loans and home insurance that is calculated on a ‘sum insured’ basis.
Let us cast an eye on 5 Mortgage and Home Loan Updates from New Zealand Banks, that you should not miss, starting with the unique features of the market.
Unique Features of NZ Mortgage Markets
A predominant feature of New Zealand’s residential mortgage market is the use of short-term fixed-interest rate periods. More than 80% of banks’ residential mortgage portfolios consist of loans that typically offer a fixed-interest period (minimum six months, maximum five years), reverting to variable rate when the term expires.
In contrast, the Australian mortgage market is characterized by floating rate regime. Lenders compete on interest rates, evident in a relatively high rate of refinancing (averaging ~ 15% per annum), whereas borrowers who elect to refinance with another lender typically do so when the fixed-rate period expires, as early prepayment causes an early prepayment charge.
Fitch Ratings opines that the sound performance of NZ prime mortgages and growth in non-bank lending is catalyzed by the RBNZ which has imposed strict limits on high loan-to-value (LVR) lending to address household vulnerability to economic shocks, coupled with stressed serviceability calculations.
No doubt, the Central Bank’s recent decision to scrap LVR restrictions on new mortgage seems to be saviour for many first home buyers.
Central Bank’s Directives To Prop Up Housing Market
RBNZ is using an NZD 60 billion bond-purchase program to lower wholesale interest rates to back the NZ economy amid coronavirus volatility.
While the RBNZ has been urging retail banks to lower mortgage rates, it expects them to transmit that stimulus to general public via lower borrowing costs to encourage spending and bolster the housing market.
Record Low Mortgage Interest Rates- Pandemic Relief?
In March, house prices at the low end of the market were growing quite sharply, where first-time home buyers are usually found to be extremely active. However, higher prices were not good news for these buyers, and NZ banks had an answer to this.
Owing to COVID-19, financial markets across the globe have been working more effectively. The economic downturn caused by the pandemic translates into difficult times for bank customers. New Zealand banks felt obliged to help customers manage home loans and took the route of slashing interest rates to record lows to aid New Zealanders with home ownership.
For instance, ASB and Kiwibank slashed mortgage rates to a record low of under 3% in an attempt to heal the extraordinarily stressful time for Kiwis- marking a new record low for major banks in New Zealand.
Double-Edged Sword- Rate Cut Benefits Customers But Insinuates Price War?
In volatile times, banks slash rates as a way of providing value to customers wherein they have the option to pay off their loan faster or keep that money in their pockets, which comes as cold comfort for Kiwis.
Low rates are expected to help borrowers, especially first-time home buyers navigate through what experts are calling a looming Global Virus Crisis (GVC).
There is another side to the story- New Zealand currently seems to be witnessing a very competitive banking environment in the housing market. Even when banks are helping customers, they are attracting people away from other banks hinting upon a price war as the race to match rates prevails.
Kiwibank’s Latest Major Move to Shake up Home Loan Market
After banks dropped their fixed rates due to cuts to the Official Cash Rate (OCR), the state-owned Kiwibank cut its floating mortgage rate/ variable loan rates by 100 basis points from its 4.40 % rate to the new level of 3.40 %- a major move that can possibly shake up the NZ home loan market as the rate seems much more competitive with fixed rates.
Most major banks are proposing floating home loan rates close to 4.44 % or 4.45 %.
Furthermore, Kiwibank has shunned the revolving home loan rate from 4.45 % to 3.45 %, business variable loan rate will fall from 6.5 % to 5.5 %, business revolving to 6.75 % and business overdraft rate from 8.5 % to 7.5 %.
The bank believes that this move will conserve home loan and business banking consumers close to NZD 20 million.
Putting more money back in the pockets of consumers will empower debt repayments, and further assist the wider economy as it recoups from restrictions cast by the pandemic. However, first home buyers are being urged to stay cautious with a looming recession and job cuts, while global vaccine developments are keeping macro-level nervousness intact. But there also stands the unique opportunity to enter the market sooner than expected in the low-interest regime for the ones with a secure job.