Cash at centre of home loan battle

Cashback is the new battleground for banks as volatile interest rates put pressure on borrowers, brokers say.

Interest rates have risen quickly over the past year as central banks around the world tried to battle inflation.

The official cash rate has lifted from a Covid low of 0.25% to 2.5%, taking home loan rates from about 2% to more than 5% in some cases.

There was some reprieve when three banks reduced their two-year special rates due to a drop in the cost of wholesale funding, but interest rate competition appears muted.

TSB has ended its 4.85% special rate and replaced it with a 4.99% one-year offer for the next three weeks.

Spokesperson Joe Bishop said the rate was below those offered by the big four banks – ANZ, ASB, BNZ and Westpac – and came at a time when many households are looking for ways to keep their costs down. The big banks are advertising special rates between 5.25% and 5.35% for one year.

‘‘If our customers are looking for a different home loan term, our new ‘rate beat’ offer will ensure they get a lower rate than any of ANZ’s, ASB’s, BNZ’s or Westpac’s current nationally advertised fixed home loan rates.’’

Banks are competing for a smaller mortgage market – Reserve Bank data shows there was $6.8 billion in new lending in May this year compared to $8.9b last May.

Real Estate Institute data shows there were 38.1% fewer sales in June than in the same month a year earlier.

Broker Glen McLeod, from Edge Mortgages, said the banks were competing most strongly with cash back offers. Kiwibank and BNZ are offering 1% – BNZ to a maximum $20,000. These are payments paid out to borrowers when a loan is taken.

But he said they were less keen to slash rates to get attention. ‘‘No-one really seems to be pushing the boat out at the moment with rates being so volatile – they’re worried that if they cut rates and things change they have to put them back up again.

‘‘Lending is tight and servicing rates are higher and therefore it is a challenging time to be able to get an approval at the moment. With house prices coming back it is opening up some room for first-home buyers to be able to purchase.’’

Loan Market broker Bruce Patten agreed cashback was the focus of competition.

‘‘It seems they are all chasing the business, however with the illness [Covid] around, they are struggling a little bit with the number of people away, so it’s an interesting time.’’