New Zealand Banks Raise Mortgage Rates Amid Global Economic Pressures

Key facts

• BNZ increased its 18-month, two-year, and three-year fixed home loan rates by 10 basis points.
• BNZ's 18-month fixed rate now stands at 4.95%, its two-year at 5.19%, and its three-year at 5.39%.
• The bank previously raised rates on April 23, with the two-year fixed rate increasing by 20 basis points then.
• ASB also raised some mortgage rates by up to 20 basis points last week.
• The Reserve Bank of New Zealand's official cash rate (OCR) remains at 2.25%.
• Markets anticipate the OCR to rise to 3.50% within a year.
• The Reserve Bank's next OCR decision is scheduled for May 27.

Banks Adjust Fixed Rates as Wholesale Costs Climb

Bank of New Zealand (BNZ) has again lifted some of its fixed-term mortgage rates, marking the second such adjustment within a fortnight. The changes, effective today, see the bank's 18-month, two-year, and three-year fixed home loan rates each increase by 10 basis points. This move reflects a broader trend among New Zealand's major lenders, who are responding to rising wholesale interest rates that dictate the cost of borrowing funds for lending. The bank's 18-month fixed rate now sits at 4.95%, up from 4.85%, following a previous 6 basis point increase on April 23. Similarly, the two-year fixed rate moves to 5.19%, an increase from 5.09% and following a 20 basis point hike two weeks prior. The three-year fixed term now stands at 5.39%, up from 5.29%. A spokesperson for BNZ stated that these regular reviews ensure home loan rates align with prevailing market conditions. These conditions are significantly influenced by wholesale funding costs, swap rates, bond yields, and projections for future rate movements, which are currently experiencing heightened volatility due to recent global events.

Competitive Landscape and Previous Adjustments

These latest adjustments see BNZ's fixed rates move closer to those of its main rivals. For the two-year term, BNZ's 5.19% now matches Westpac's offering, positioning them as having the equal lowest rate among the big five banks. The 18-month rate of 4.95% also matches ASB's current lowest rate for that term. However, BNZ's three-year fixed rate of 5.39% now surpasses Westpac's rate of 5.29% for the same term. Last week, ASB had already increased some of its mortgage rates by as much as 20 basis points, with its one-year fixed home loan rate rising by 6 basis points to 4.65%, also matching the lowest among the big five. Smaller lender TSB has offered a special one-year fixed rate of 4.59% for borrowers with at least 20% equity.

Global and Local Pressures on Interest Rates

The upward pressure on mortgage rates is intrinsically linked to the cost banks incur to fund their lending operations. Wholesale interest rates, which serve as a benchmark for these costs, have been on the rise both domestically and internationally. Global events, including the oil crisis exacerbated by the conflict in the Middle East, have stoked inflation concerns. This inflationary environment has led to speculation that central banks, including the Reserve Bank of New Zealand (RBNZ), may need to increase interest rates to curb rising prices. The RBNZ maintained its official cash rate (OCR) at 2.25% last month, with the next decision due on May 27. However, market pricing indicates expectations for a series of OCR hikes over the coming year, with an eventual rate of 3.50% anticipated within 12 months.

Economic Indicators and Market Expectations

Recent data from the RBNZ reveals a robust demand for mortgage loans, significantly outpacing demand for business or rural borrowing. This resilience in the housing market occurs even as the broader real estate market shows seasonal weakness and price declines. Locally, inflation remains a key concern for the RBNZ. Internationally, markets are closely watching the Reserve Bank of Australia (RBA), which is expected to raise its cash rate target by 25 basis points to 4.35% today. Such moves can create an echo effect on domestic rates. Furthermore, the resumption of low-level hostilities has contributed to a rise in global benchmark rates, impacting longer-term swap rates in New Zealand. These external factors suggest that fixed rates for one-year terms and longer could see increases sooner than anticipated based solely on domestic RBNZ actions.

Financial Performance and Lending Trends

a statutory net profit of $494 million for the six months ending March 31. This figure represents a decrease of $301 million, or 38%, compared to the same period in the previous year. The bank's operating expenses rose by $352 million during this six-month period, largely attributed to escalated costs associated with replacing its software systems. Despite the profit dip, total home lending at BNZ saw a substantial increase of 17.5% in the six months to December. First-home buyers accounted for nearly a quarter of all new home loans during this period. Separately, Reserve Bank governor Dr. Anna Breman noted that an agreement to update the committee's charter is part of a broader initiative to enhance transparency within the RBNZ.

Outlook for Borrowers

The confluence of rising wholesale costs, global inflationary pressures, and domestic economic indicators points towards a sustained period of increasing interest rates in New Zealand. Borrowers considering taking out new loans or refinancing existing ones are likely to face higher repayment obligations in the near future. Financial institutions will continue to monitor market dynamics closely. The flexibility offered to borrowers will ultimately depend on their individual financial strength. For those seeking to navigate these shifting conditions, tools such as home loan comparison calculators, which account for fees and incentives, can provide valuable insights into the true cost of different mortgage offers.

The bottom line

• Major New Zealand banks, including BNZ and ASB, are raising fixed mortgage rates due to increasing wholesale funding costs.
• Global economic factors, such as inflation and geopolitical events, are contributing to rising benchmark interest rates internationally.
• The Reserve Bank of New Zealand is expected to begin increasing its official cash rate from the current 2.25% later this year.
• Market expectations suggest the OCR could reach 3.50% within the next 12 months, signaling higher borrowing costs ahead.
• Despite profit declines, BNZ has seen significant growth in its home lending portfolio, with first-home buyers being a key segment.