Cashing in on competition

Homeowners have another chance to cash in on bank competition to pay off their mortgages faster.

Westpac and HSBC are now offering a 3.95 per cent home loan rate to qualifying borrowers. Westpac’s deal is for one year and HSBC’s for three.

The rates are as low as any that have been offered in the New Zealand market.

There are some catches: Westpac’s deal requires borrowers to have at least 20 per cent equity and their income credited to a Westpac account.

HSBC’s offer requires a home loan of at least $500,000, or $100,000 in savings with the bank.

But taking advantage of the rate should pay off.

If a borrower switched from the current market median three-year rate of 4.89 per cent to the 3.95 per cent rate, they could reduce fortnightly payments on a $500,000 mortgage from $1334 to $1211.

If they switched the rate and kept the repayments the same (and were able to maintain that interest rate difference for the life of the mortgage), they’d knock off the mortgage repayments three years earlier and would save more than $125,000 in interest.

Of course, rates are likely to move over the decades that most people have a home loan. But any extra paid off when interest rates are low reduces the impact of rate rises in future.

ASB economist Jane Turner said she expected retail borrowing rates to increase by 100 basis points from now until a peak in 2022.

That would mean the median 4.89 per cent rate would turn into 5.89 per cent.

‘‘However, if economic growth, wage growth and inflation pressures continue to underperform expectations, it is possible retail borrowing rates won’t rise quite so high or possibly peak later.’’

Turner said changes proposed by the Reserve Bank that would require banks to hold more capital in reserve would increase the cost of borrowing.

‘‘The main implication of these changes is that the cost of funds for banks will increase, and we expect that banks will pass on a portion of the higher cost of funds [to borrowers],’’ she said.

‘‘Equity capital is the most expensive form of banks’ funding. We expect higher minimum capital requirements will directly increase bank funding costs by at least 50 basis points.

‘‘This is at the conservative end of our estimates and a large range of uncertainties remain.’’

But independent economist Cameron Bagrie, of Bagrie Economics, said he expected little change in mortgage interest rates.

‘‘We may see a change in the mix, with higher bank margins offset by a lower official cash rate. [It’s] all very dependent on inflation remaining tame,’’ Bagrie said.

‘‘I can’t see growth being strong enough to drive inflation up but [I] do worry about the amount of cost pressures.

‘‘The scale is difficult for some sectors to absorb, so we’re seeing inflation slowly rise while growth is slowing.’’

‘‘We expect higher minimum capital requirements will directly increase bank funding costs by at least 50 basis points.’’ ASB economist Jane Turner