How do banks quote interest rates?
Interest Rate Market Update - November 2018
With less than six weeks till Christmas, it’s worth covering what’s been going on with interest rates and how to take advantage of the intense pricing competition between the New Zealand banks. It’s spring/summer time so a large portion of bank lending is up for renewal and banks are fighting hard for YOUR business.
Competition has ramped up on most terms from 6-month fixed rates through to 36 months. We’re starting to see attractive rates around 3.95% from major banks between 6 – 12 months. 24-month rates float between 3.99 – 4.19% and 36-month rates are around 4.29% – 4.39%. The actual rates are lower than this, but unfortunately, not every client is getting this.
The last time I saw competition like this was in mid-2016 and at similar levels. In early 2017 the interest rate market turned to go back into the mid 4’s with only a negligible change in wholesale funding costs.
The primary factor was the reducing bank margins amidst increasing competition between banks (especially for creditworthy borrowers) to avoid losing market share, so I’d anticipate a similar change in the months to come. This is echoed by Westpac CEO David McLean – “…Spring tends to be a much-heightened area of activity compared to winter and therefore banks gear themselves up to compete quite vigorously in that period.”
Although these rates are appealing, remember that those are advertised rates. The advertised rate you see is rarely the rate you pay as there is a discount margin below this. When you have a broker with access to a bank’s broker unit or a private banker, you’ll receive that discount most of the time on the advertised rate.
Where I see most borrowers miss out on the great rates is when they don’t have a mortgage strategy in place and the factors which drives the best interest rates aren’t considered. The discount margin is temporary so it’s important to review your current circumstances to see if it can be taken advantage of.
Critical factors influencing interest rates in 2018
1. Bank Competition & Rates
Every lender strategically chooses which rates they want to compete on from a marketing perspective. Otherwise, it’s a race to the bottom and drags all the other rates down. Brokers can tell which lenders are favouring shorter-term rates and those who favour longer-term rates. Unless you work in a mortgage lending department in a bank, it’s unlikely that you will know or follow such trends.
2. LVR (Loan to Value Ratio)
The lower your LVR, the more likely you’ll get a better offer. Banks do this in increments, so those with an LVR between 60 – 80% will typically get a minimal discount, and those below 60% will be in the top bracket for a large discount. One issue we’ve noticed is that banks frequently use old valuations and therefore you may not be getting any traction. Consider working with a broker and going through a process to review the valuations the banks use. You can then decide if there is any value in ordering a Registered Valuation to obtain a further discount on interest rates
3. Security Offered
This refers to the types of properties that the bank has as a security.
If you have your family home – also known as (PPOR – Principal place of residence) – you’ll have a preference for the best interest rates generally.
If all your lending at a bank is secured by investment properties your interest rate is generally slightly higher 0.10 -0.20%. BNZ has recently made an update on their website to clarify that investment only portfolios have a 0.10% premium. There was quite a bit of backlash in the investor community when this news broke. However, this has been a common practice for several years. Most other lenders follow a similar policy but haven’t publicly clarified (yet). When brokers review client portfolios, good brokers strategically look at which lender has a preferable policy for their set of circumstances.
4. Serviceability of Borrowers
This mostly affects new lending more so than existing lending. When there is strong serviceability it helps in the overall negotiation process. The impact isn’t as high as the other factors but helps in leveraging an overall competitive offer.
Cashback is an incentive for new lending to help with the costs (such as legal fees) in getting the loan in the first place and of course for any other use (such as Xmas presents). Several years ago, this was often in the form of gifts such as TVs, holidays, minimal legal costs etc. Today it’s a calculated offer and requires a commitment between 3-4 years to not move banks. Cashback offers are generally between 0.30 – 1.00% of the total new lending. Some banks prefer to compete on interest rates, others on cashback, and others are welcome to negotiate an offer in between. Brokers can help you calculate which offer is most advantageous and negotiate appropriately.
The silly season is also an expensive time of year. Gifts, holidays and time off work all contribute to stretching the budget beyond its limits. It’s also a good time to examine your budget and start planning for your next move in 2019. This would probably include reducing your credit card debt (New Year’s resolution)!
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