Mortgage rate drop may not lure borrowers 

Source: NZPA / Ross Setford

Mortgage interest rate cuts like those announced by ANZ National Bank on Thursday may not stimulate demand for home loans because borrowers are worried about their jobs.

ANZ and National Bank, the country's biggest bank, is cutting its two-year fixed rate to 7% and its three, four and five-year fixed rates to 7.10%. The yield curve of its fixed-rate mortgage products has flattened.

Industry observers said the moves brought the bank's brands into line with other lenders and reflected falls in the wholesale interest rate swap market.

The move also comes as economists call on the Reserve Bank to cut the Official Cash Rate (OCR) further at its next announcement on January 29.

"I'm not sure that the level of interest rates is the major disincentive to borrowing currently. The major disincentive to borrowing is questions like, am I going to have a job next week," said David Tripe, director of Massey University's Centre for Banking Studies.

The state of the job market is seen as important in influencing sentiment about the economy, which is currently bleak. Prime Minister John Key on Thursday announced an employment summit to be held in Auckland next month.

Tripe said funding costs were higher for longer term fixed mortgage rates but swap rates on the money market have come down.

The margin above swap that fixed mortgage rates are set at continues to be historically high.

The five-year swap rate was around 4.65% on Monday, which is still well below the new ANZ National five-year fixed mortgage rate of 7.10%. The five-year swap rate has fallen from 5.05% in mid-December.

During so-called mortgage wars the difference between swap and fixed mortgage rates has been less than 100 basis points, or a full percentage point.

Tripe said the swap rates have fallen by more than banks are reducing rates.

Still, banks are facing higher funding costs in the current credit crunch but just how much higher is not known.

Banks have also tightened lending criteria, requiring people buying houses to have bigger deposits.

The Reserve Bank is expected to cut the OCR, which is a base rate for the banking system, further.

It was last adjusted on December 4, when Reserve Bank Governor Alan Bollard slashed the OCR by 1.5 percentage points, taking it to 5 percent. The OCR has been cut from 8.25% in the middle of last year.

BNZ economists said a cut of 75 basis points, taking the rate to 4.25%, was likely on January 29.

Following the bleak results of the New Zealand Institute of Economic Research's (NZIER) quarterly survey of business opinion released on Wednesday the NZIER said there was a "huge scope" for the Reserve Bank to cut interest rates, probably between 50 and 100 basis points.

"But if they went beyond 100 points we wouldn't be too surprised about that," NZIER research economist Ryoko Ito said.