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 for other than those inside the bank to know, it seems the strategy was not particularly successful. Our analysis of market share over the years shows there were 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 a “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. 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 in places like here,  you can compare them. From time to time there will be good deals, so look out for them.

Philip Macalister is the publisher of mortgagerates.co.nz and the NZ Mortgage Mag

TSB Bank has put out a very sharp two-year rate of 5.99%. In normal times you would expect its competitors to follow, but this isn’t normal times.

It seems the large banks are not interested in chasing new business at the moment and none have any plans to start doing so in the near term. I suspect, unless there is a big change in the market conditions, we will see very few of the traditional spring advertising campaigns.

Therefore the prospect of any price war around spring is low.

But we are in the middle of winter and it is solstice.

The lenders you would expect to compete against TSB, such as Kiwibank and BNZ are unlikely to move. BNZ is totally focused on getting money in the door, not lending it out. Kiwibank has so much new business and so many existing customers it is unlikely to match TSB.

In fact if you look at our rates table you will see Kiwibank has one of the highest two-year rates of any bank.

There is a lot of head scratching going on over the future of home loan rates this week. As I said last week the Reserve Bank is saying its base official cash rate is likely to stay around the 2.5% mark until 2010 and home loan rates should stay down.

However, the market is disagreeing with the central bank, and saying that rate increases will start early in 2010. A wrap of what the economists are saying, now they have had some time to digest the RBNZ announcement and review the market reaction, is here.

This split in opinion is quite critical for borrowers. Most experts, whether they are economists or mortgage brokers, are saying the best strategy at the moment is short-term rates. Go for six-month or one-year terms and look to roll them at maturity.

However, many comments to the previous Blog suggested going long makes the most sense at the moment. A couple things to consider are that long-term rates, particularly five-year rates, are sitting at their historical average and are very close to where they were a year ago.

Short-term rates are some of the lowest on record, and as this graph shows, are significantly lower than a year ago. Indeed the six-month rate is more than 400 basis points lower than this time last year.

The other bit of information to consider is that a couple of years ago a piece of research was done which suggested the best interest rate strategy is to use the one-year rate and roll over on that.

What’s happened in the past week?
During the week we have seen only one bank move its rates, that was Westpac, which increased its three and five-year rates 10 and 30 points respectively. The move keeps it in line with other banks, but still on the lower side.

The only lender to decrease rates was No 8 Mortgages. It looks good dropping its floating rate 100 basis points and some of its other shorter-term rates, while it raised long-term ones. However, readers should note No 8 is a specialist lender, so its rates aren’t directly comparable with the banks.

The only other lender to shift its floating rate was co-operative PSIS which increased its floating rate 20 points to 5.95% and keeps it as one of the best-priced in the market.

To check and compare rates go to www.mortgagerates.co.nz

All the attention on long term home loan rates last week was meaningless. So what if the five-year fixed rate has now hit the 8% mark, which is around its average over recent history?

The reality is that fixing for that length of time at that rate is madness – unless you think it’s a good deal and like to know the certainty of interest rate payments over the next five years.

Currently the best borrowing strategy is clear. Go short (floating or up to 12 months) and stay there.

As our rates table shows six-month rates are the lowest priced option in the market by a considerable margin at present.

The Reserve Bank governor Alan Bollard would like to see them come done some more, but as this earlier post says, the central banks and politicians are impotent on this front.

The stay short strategy makes sense and fits with what the Reserve Bank is saying.

Its clear message at this week’s official cash rate announcement was that we are at the bottom of this interest rate cycle. It’s unlikely rates will go lower, and if they do don’t bet that home loan rates will tumble too.

It’s been a bit of a no brainer what to do, and even what to do in the short term. The tricky part of borrowers is what strategy to adopt when rates start rising.

If you think that Bollard gave a guarantee that short-term rates will stay low till the end on next year – be careful.

Rates will rise and they could rise more quickly than predicted.

When this happens the decisions will be tougher to make.

Prudent borrowers should be considering all the options at the moment and have plans to deal with them in case the unexpected happens.

Well I think that is what MPs are saying in this report yesterday. Let’s have a look at this argument that these big Australian banks are creaming profits at the expense of Kiwis because they haven’t passed on all the recent OCR cuts.

Our graph here shows clearly that bank margins on floating rates have increased as the OCR has come down. Does that mean they are profiteering?

We don’t know and nor do the politicians. These big banks are complex businesses and sometimes it is dangerous to look at one set of numbers in isolation.

It is not up to politicians to tell banks where they should be setting their interest rates. If that is what they think they should be doing then make some regulations and tell the bankers how to run their businesses.

I thought, no matter whether it is a National-led or Labour-led government, that we had a free market in this country? Likewise I don’t recall the politicians stepping in when the mortgage price war was going on saying that rates were too low and they were worried banks were losing money.

MPs are as impotent as the Reserve Bank is at forcing change to retail interest rates.

Tomorrow with the OCR announcement we will see what the Reserve Bank governor Alan Bollard has to say about the situation. My feeling is that he isn’t that worried about home loans rates and what is going on in that market. The housing market is bubbling along OK, prices seem to have plateaued out and there is sufficient activity to keep the sector healthy.

It isn’t likely to burst into any great boom at the moment as the fundamentals just aren’t right.

The much bigger issue for the Reserve Bank and the economy is what’s happening with the currency and how that is severely hurting our export sector.

Taking this as the key issue then the central bank has little choice but to cut the OCR at least 25 points. Such a cut won’t be primarily designed to bring home loan rates down.