Choose mortgage deal carefully

OPINION: Is it really time to revolt against the big banks?


Rod Oram argues here that it’s time we revolt against the big banks because they are “enjoying excessively healthy lending margins”. While I respect Rod, I am not sure I can agree with his argument, and his proposition that we should all back Kiwibank.

Watching how lenders price their mortgages to customers is something we have been doing since 1992. One of the things which is clear is that home loan rates aren’t set on pure economics. They are also priced strategically for short-term business reasons. For instance earlier this year when borrowers rushed to fix their loans for medium to long terms, the banks could not manage all the business.

The best way to stop it was to increase the rates and make them unattractive. The trouble here is some people didn’t see what was happening and I suspect ended up fixing at rates which in the long-term won’t look like a great deal. On the other side we see banks cut their rates simply to win market share. BNZ did this with its “Unbeatable” campaign a number of years ago, simply to gain customers. While it is impossible other than for those inside the bank to know, it seems the strategy was not particularly successful.

Our analysis of market share over the years shows there was little gains for the bank and many consider the business written was only marginally profitable, if at all. These days the BNZ isn’t a leader in price wars. Its strategy is to have one “hero” rate, branded under the “Classic” label to attract business. Right now it doesn’t even offer an “Classic” rate. Then we come to Kiwibank.

It has until recently been the leader in cutting rates, and has attracted a huge amount of new customers. Now it has the issue of managing all those customers and funding the business. Clearly this is a big challenge. If you compare its rates to other lenders at the moment, it is not particularly sharp on price.

This graph here shows that Kiwibank’s two-year rate is higher than the median for the big banks, while two other local institutions, PSIS and TSB are far more attractive. Challenging the big banks and taking your business elsewhere is fine. However there are plenty of alternative lenders other than Kiwibank. In the mix are SBS Bank, PSIS and TSB, which all offer competitive rates. There are plenty of other sound institutions such as the building societies too.

New Zealand had, until recently, a large (in number) non-bank lending sector. That provided some good options for borrowers. Unfortunately the sector has been killed by the withdrawal of wholesale funding lines (from organisations including GE and ANZ).

One of its big problems is that the money this sector used came out of Australia and across the ditch they love floating rates rather than fixed rates like we do. The non-banks struggled to compete when Kiwis chased fixed-term rates. The irony is that now floating is in vogue the sector which was highly competitive to the banks has gone. While we can all rail against the big banks and their profit margins, we should also be thankful.

If these banks were less sound than they are, then the New Zealand economy would be in a much worse shape during this recession that it is now. Rod is right, when you are looking to borrow money, consider options other than the big banks. There are plenty to choose from and places like here where you can compare them. From time to time there will be good deals, so look out for them.

*Philip Macalister is the publisher of and the NZ Mortgage Magazine.