The head of the country’s largest mortgage broking firm says retail borrowers aren’t getting the full benefit of the reduction in interest rates.
Photo: RNZ
The Reserve Bank doesn’t have a clear understanding of how households are experiencing interest rate cuts, the head of the country’s largest mortgage broking firm says.
Squirrel chief executive David Cunningham said retail borrowers were not getting the full benefit of the reduction in interest rates for two reasons.
One was that banks had expanded their retail margins since Covid.
KPMG’s Financial Institutions Performance Survey for last year showed a net interest margin of 2.34 percent compared to 2.1 percent in 2019. This represents the difference between what banks pay in interest and charge borrowers.
The other was that borrowers’ fixing patterns limited their exposure to interest rate changes.
“The track of household average interest rates barely gets mentioned. Although the OCR (official cash rate) is 2.5 percent lower, mortgage rates are 0.75 percent lower and only have another 0.75 percent to go.
“The Reserve Bank overstates the impact of monetary policy easing, which has had a relatively small impact on households so far.
“Assuming we get to a 2.5 percent OCR, that’s 3 percent of cuts delivering a 1.5 percent reduction to households.”
He said because some borrowers had not repriced on to the highest rates of the cycle, the full impact of the OCR increase had not flowed through to them, either.
“So we have avoided more flowing through that would have pushed rates higher. But it’s fixed mortgage rates not the OCR that influences what people are paying.
“The Reserve Bank and economists have vastly over-stated the expected impact of the OCR cuts. Households haven’t had a huge benefit so are keeping their wallets in the pockets. This is keeping the NZ economy floating in and out of recession.”
He said the OCR should be cut to 2 percent.
“That will take mortgage rates to 4 percent by Christmas and help dig NZ out of the hole it is in.”
Photo: Supplied / Gino Demeer
Kiwibank chief economist Jarrod Kerr.
But Jarrod Kerr, chief economist at Kiwibank, said the reductions had made a difference to borrowers.
“We have seen 250bps (basis points) of cuts to the OCR, and mortgage rates have fallen from 7.5 percent to the mid-4s, that’s feeding through as most people roll off – 81 percent of the mortgage book is fixed for less than a year, with over 50 percent fixed for less than six months. That’s fast. Many people choose to pay the same amount, paying more principal. But that’s a choice.”
Mike Jones, chief economist at BNZ, said it was not so much that the impact of the OCR cuts was overstated as that it took time to flow through to borrowers because they preferred fixed-rate mortgages.
“The impacts of cutting the OCR certainly don’t turn up overnight. The cash rate has now been lowered 250 basis points from the peak this time last year. That’s pulled one-year fixed mortgage rates down about 265bps from their peak. But RBNZ figures still show that the average mortgage rate being paid is down only about 75bps from the 2024 highs, at 5.67 percent in June.
“It’s worth pointing out that the average paid rate didn’t go as high as mortgage rates did on the other side of the cycle (6.39 percent vs. 7.4 percent), so there is a smoothing element happening.
“But it also reflects varying term preferences and more generally the time it takes for people to roll off old rates onto new, lower rates. The good news is that we think the average rates mortgage borrowers are paying will continue to ratchet lower over the rest of this year, and probably at a faster pace than what we’ve seen to date given about 45 percent of the mortgage book will experience a rate reset over the coming six months. We estimate a decline to around 5 percent by the end of the year.”
Westpac chief economist Kelly Eckhold.
Photo: Supplied / LinkedIn
Kelly Eckhold, chief economist at Westpac, agreed there was a difference between what rates were advertised and the actual mortgage rate people paid.
“In terms of the net impact on consumption, it is absolutely the case that there are winners and losers out of an increase and a decrease in interest rates.
“Obviously, there has been commentary I’ve seen about, you know, lower interest rates being bad for savers … But then if we think about how do we model the impact of monetary policy on things like consumption? Well, we kind of look at the overall correlation between interest rates and consumption. And that is going to reflect a mix of different types of people in different situations, whether that be leveraged households or non-leveraged households, people with debt, people that don’t have debt, older people, younger people.”
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