Rates are slowly starting to come down since the OCR cut, but as mentioned last week, some banks have only passed on 10 points (of the 25 point cut) in there floating rates, with Westpac & HSBC still on 5.75%. HSBC has the distinction of advertising the lowest rate (3.95% for 18 months) and the highest (5.75% floating). The banks have continued to drop their fixed rates and specials, so there is now quite a distinction between what each bank is advertising, for example the lowest ‘carded’ floating rate is 5.45% (Co-op Bank), that’s 30 points lower than Westpac & HSBC. We continue to get good traction in terms of discounting with the 12 month rate moving down slightly last week to 4.09% and most banks are at 4.15% for 18 months and 4.19% for 2 years. The bank’s still have good margins on these fixed rates and I believe we will see the rates come down a bit further over the next few weeks as they strive to be competitive with each other.

After the OCR cut and the mixed reaction from banks, this has predictably sparked debate from economists and politicians as to the validity of the excuse for not passing on the full 25 points, here is a segment of an article from Bernard Hickey on the subject;

“Most economists see the OCR being cut to 2.0% by August 11 at the latest. ANZ and ASB see it being cut as low as 1.75% by the end of the year. However, not all of the surprise cut was passed on to floating rate borrowers and initial signs are that banks are keen to hold on to some of the fall in interest rates to bolster their net interest margins. They argued that their costs of foreign funding were higher, but there’s debate about that. Banks have put their margins under pressure over the last year with aggressive discounting in fixed rate mortgages, but the prospect of hefty losses from dairy lending may be forcing the banks to blunt some of their sharper prices. Wholesale swap rates fell 20-25 basis points after the rate cut, increasing the pressure on banks to pass some or all of it on to fixed rate borrowers”

As mentioned last week the current situation is giving banks the option to differentiate themselves from the others, by either dropping the floating rate in full or by heavy discounting. It’s interesting to note that ANZ will often discount their floating rate by 100 points to selected clients, which means a floating rate of 4.64%, with the possibility it may be as low as 4.14% by the end of the year if they pass on the predicted cuts in OCR to 1.75%. This does make choosing the right bank for clients even more interesting and this is where I can come in and can apply my knowledge and banking experience to clarify what their best options are with the banks. As mentioned last week I deal with experienced lending staff and I am more likely to get the best discounts from the most appropriate bank plus my services and advice is free to clients and may save them thousands of dollars in interest costs over the life of their loan.

Well didn’t the Reserve Bank spring a surprise on the local lenders on Thursday! The Reserve Bank lowered the Official Cash Rate by 25 points on Thursday. This took the market by surprise, as many were predicting a cut, but not until June. The reasons given were sound: a deteriorating world growth outlook, extremely low inflation and a difficult dairying sector. The immediate effect was seen in our currency, particularly against the Australian dollar, which eased to under 90 cents. There were decreases, albeit smaller, against the USD dollar and the Euro.

One of the only ones to pick it were KiwiBank although ANZ changed their stance in the last day or so for reasons I will explain further down this page. A number of the banks have dropped their fixed rates and specials.

As mentioned last week, we were starting to get good traction in terms of discounting and after the OCR cut there was a mixed reaction from banks with some cuts to their floating rates, but not the full 25 basis points (except for The Co-Operative Bank). They claim increasing wholesale funding costs as the reason for their moves as the article below details. But at the same time Sovereign and ASB has made cuts to many of fixed rates from six months to three years.

If the banks continue to ‘fudge’ the OCR drops this year – it’s anticipated at least 1 or maybe 2 more drops to come in 2016 - it is going to spark some pointed questions and interesting debate on banks true cost of funds, which may shine the spotlight on something banks don’t necessarily want scrutinised too closely. For now, it is giving other banks the option to differentiate themselves, as Cooperative Bank have, by passing on more of the drops than the ‘Big 4’ are willing to pass on.

This will make choosing the right bank for clients and buyers even more interesting and this is where I can come in and can apply my knowledge and banking experience to clarify what their best options are with the banks. As mentioned last week I deal with experienced lending staff and I am more likely to get the best discounts from the most appropriate bank plus my services and advice is free to them and may save them thousands of dollars in interest costs over the life of their loan.

We are now getting some traction from the banks in terms of discounting with most banks now offering under 4.2% for 12, 18 & 24 months fixed rates. The only bank holding out on discounts for loans under $300k at the moment is ASB, but even they are offering good discounts in the $500k plus range. The RB is due for their 6 weekly review on Thursday and most of the bank economists are predicting the OCR will be left unchanged but still hold the view that the RB will have to drop a further two times this year, likely mid-June & sometime in the last quarter of the year. This will see the OCR down to 2% by Christmas, which with current discounts could see clients with floating and revolving credit rates below 4.50%.

However, while most bank economists seem to agree the RB will have to drop twice this year, not all are predicting Thursday’s announcement will be to hold. Here’s an article from KiwiBank’s economist;

“Kiwibank has said the Reserve Bank of New Zealand will cut interest rates on Thursday next week, the lender predicts the cash rate will be cut by 25 basis points in March and June to reach a record low 2%, a change from its previous view that the OCR would hold at 2.5% for the rest of 2016. Kiwibank senior economist Zoe Wallis said several pieces of data produced over the past month had encouraged the change of opinion. “These include; significant fall in inflation expectations, waning business confidence, a lower global growth outlook and strong gains in the New Zealand dollar,” said Wallis. “The global growth outlook has weakened at the same time as dairy prices continue to fall and the New Zealand dollar remains elevated – reducing New Zealand’s growth and inflation outlook. Given the changes in the domestic and global environment, we now anticipate that the RBNZ will need to further cut the OCR down to 2 percent in coming months. While there are some arguments in favour of waiting, we see 25bps rate cuts in March and June as the most reasonable response to the shifting outlook.”

As usual, Thursday’s RB announcement will be eagerly anticipated by many and if they do drop the OCR, then client’s will feel the benefit of a 25 point drop in their floating rates, which again is good news for the market and should also fuel buyer confidence that their cost of funding is likely to be stable if not cheaper while they spend time looking for the right property for them.

In saying that I have recently had investors complaining to me that their bank is making it more difficult than ever to lend on an investment property due to the RB restrictions of 70% LVR in the Auckland area. It’s fair to say that if you are an investment borrower, it’s likely you not only have to comply with the 70% LVR, but also the banks sensitivity test interest rates (ranging from 7.05% to 7.40%) while at the same time the predicted rental income is scaled at 75%. Plus the testing is completed on a loan reduction basis (P&I) rather than interest only, which most investor would normally choose. This generally means that what fits as an acceptable return for an investor may not actually fit the bank’s lending criteria. Even some bank staff struggle with the current regulations and turn clients away because of it.

This is where I can come in and can apply my 30+ years of banking experience to clarify what their investment options are with the banks. I also deal with experienced lending staff, generally on the business side for investors, who know what they are doing and I can clarify any complications such as owner occupied security properties and investments outside of Auckland (different LVR’s), plus mitigant any shortfalls to help get an approval through. My advice is free to clients and will help them buy the investment property they want.