RBNZ Governor Graeme Wheeler sees limits to fixed-term mortgage rate reductions

Short headline: 
Wheeler suggests mortgage market bottoming

By Gareth Vaughan

Reserve Bank Governor Graeme Wheeler is suggesting the latest round of fixed-term home loan rate cuts may be nearing its end.

Speaking at a press conference after the central bank issued its Monetary Policy Statement (MPS) yesterday, Wheeler was quizzed about the competitive home loan market. Recently TSB Bank became the first New Zealand bank to introduce a 10-year mortgage, and this week SBS Bank became the first bank to offer a carded fixed-term rate below 5% since mid-2013 with a 4.99% five-year offer.

"There's a lot of competition for lending clearly, and we're seeing reductions in fixed-term rates. (But) I think there's probably limits to how much further that process could go in terms of bank profitability objectives and their funding costs, if you like," Wheeler said.

In its MPS the Reserve Bank points out since last July the average two-year fixed rate has fallen about 95 basis points, while the average three-year fixed rate has fallen by about 85 basis points. Over the same time period, which is since the Reserve Bank last increased the Official Cash Rate, the average floating mortgage rate has been unchanged with a downward trend in swap rates feeding through to the lower fixed mortgage rates.

Wheeler, meanwhile, highlighted the dominance of shorter-term fixed rates in New Zealand.

"At this point you only have 3% of mortgage holders with fixed rate mortgages for more than three years," said Wheeler.

"I think something like 55% of mortgages are either floating or maturing within the next 12 months. So we feel we still have a lot of bite through our monetary policy."

"Over time I think it would be a good thing if we had longer maturities. Over time, in general, as we develop greater opportunity for borrowers and investors in terms of the capital markets," added Wheeler.

The recent trend among mortgage borrowers has been towards fixing. In its MPS the Reserve Bank highlighted that the proportion of mortgages on floating rates or fixed for less than one year dropped to 56% in January from 74% a year earlier.

"The mortgage book overall remains fairly short in duration, with only three percent of mortgages on fixed rates of more than three years. The weighted average time to re-price mortgages increased to 12.0 months in January, up from 8.4 months a year earlier," the Reserve Bank said.

The central bank also said marginal bank funding costs have increased slightly over recent months, but still remain near six-year lows.

"There have been few overseas long-term debt issues by local banks, reflecting that they are well funded by strong deposit growth while credit growth has remained modest."

Meanwhile, Wheeler said bank lending to investors is running at about 35% of bank residential mortgage lending nationwide, and about 40% in Auckland.

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