How NZ mortgage deals stack up

New Zealand mortgage-holders may be getting a better deal on their home loans than counterparts in Australia, but it could be at the expense of savers.

Data provided by Canstar shows that in New Zealand, the premium paid by home loan borrowers compared to the official cash rate (OCR) ranges from 92 basis points for five-year fixed terms, with an average rate charged of 6.42%, to 127bps for oneyear rates, at an average 6.77%.

Floating rates being issued are 289bps above, on average.

In Australia, the average oneyear rate is 204bps above the cash rate of 3.85%, two-year rates are 218bps above and five-year rates 268bps. Floating rates are 217bps.

David Cunningham, chief executive of mortgage broking firm Squirrel, said apart from the floating rates, New Zealand’s home loan interest rates were much closer to the wholesale rate banks were charged.

In Australia, the proportion of mortgages on fixed terms at the end of 2022 was just over 30% compared to New Zealand’s 90%.

‘‘In Australia most of the market is variable rates, and there are lots of ‘honeymoon’ or refinancing deals,’’ Cunningham said.

‘‘There was a burst of fixed rate borrowing when interest rates were really low, but talking to a broker in Australia yesterday, almost all deals are now going through as floating. Australian customers get a much better deal on floating rate loans than New Zealand, and have for three decades’’

But Cunningham said even though their margins might looked smaller on fixed rates, New Zealand banks made larger margins overall, due to the lower interest rates paid on savings accounts here, and the balances in transaction accounts that received no interest. Savings account interest rates had risen a lot more in Australia, he said.

‘‘We’re seeing more crosssubsidisation between savers and homeowners in New Zealand than in Australia. Australian transaction account balances are relatively much lower.’’

There was inertia among customers who did not understand they could getting a better return on money in low- or no-interest accounts, he said.

‘‘Interest margins have blown out because of the windfall on transaction accounts. Banks in Australia are paying a lot more for retail deposits.’’

Cunningham said Australian banks were reporting overall interest margins of about 2% compared to 2.4% in New Zealand.

‘‘On the face of it, Australians – relative to wholesale rates – are paying more than New Zealanders. But in terms of actual bank margins, because of cross subsidisation Australians are getting a better deal because of some of those woeful deposit rates in New Zealand.’’

He said fixed interest rate terms started to become popular 30 years ago when banks used them to ‘‘compete at the margins’’.

‘‘Only 10% of mortgages in NZ are floating rate. But with $35 billion of these loans, all the banks have an interest in keeping the floating margins high.’’

He said there was discounting on floating rates, but the margins were still double what banks made on fixed rates. ‘‘There’s discounting on floating home loan rates in Australia too, so I’d guess the underlying floating margin there is nearer 1.6%. Which means floating rates are at or about the level of fixed interest rates.

‘‘New Zealand banks take fat margins on floating rate loans so everyone goes fixed, whereas in Australia fixed and floating rates are similar so people go floating.’’

Infometrics chief forecaster Gareth Kiernan said another issue was the ‘‘significant negative slope’’ of the yield curve. Longerterm borrowing is currently cheaper than shorter terms in New Zealand, because markets expect interest rate cuts in future.

‘‘With New Zealand’s longerterm wholesale rates below the OCR, the fixed mortgage rates are being dragged downwards relative to the OCR more than they otherwise would be.’’

In April, New Zealand’s average 10-year bond was 4.11% compared to 3.34% in Australia, while the OCR was about 150bps higher.