Over the period of 12 months or so, the banks have been reluctant to give discounts on interest rates, fees and sanction generous legal fee contribution to home mortgage clients. No mortgage price war has taken place over the last many months.
There was a time when the banks used to compete aggressively for new mortgage business. The loan processing fee, the Low Equity Premium/Lenders Mortgage Insurance was discounted, even waived; the interest rates were discounted sharply to win over the business. Some of the banks used to run campaigns like free house and contents insurance for 12 months or so if you take housing loan from those institutions, etc. At that time, the banks were operating on very thin margins and were thriving on higher volumes.
After the onset of financial crisis, these promotions and aggressiveness to win over new business has disappeared. The primary reason is shortage of funding available from international markets at competitive pricing.
Also the Reserve Bank of New Zealand has asked for certain Loan/ Deposit ratios to be met within certain time frame.
RBNZ wants the banks to have maximum of their lending financed by local deposits and long term offshore borrowings. This is the reason, the term deposit rates offered by different banks are very attractive and these days the war is on deposit front and the banks are competing to get more and more deposits.
In the long run, these measures will boost the strength of New Zealand banks and these will be able to absorb financial storms more easily.
But, in the short run, the lending will become stricter, the banks will tighten their lending criteria and home mortgage lending will further dry up.
As the banks are not lending aggressively and their asset growth is sluggish, these are trying to shore up their profitability by charging higher margins on the loans they are advancing.
Some of the banks have already stopped waiving off loan re fix fee, which was a usual practice over the last few years.
Very soon, the banks may start charging loan processing fee, loan re-fix fee, will stop offering legal fee contribution altogether. The customers will have to be content with carded rates offered by banks, the discounts will disappear. High loan to value ration loans may be charged even higher LMIs and LEPs.
Mortgage payers should become prepared for the same and adapt to new changes at the earliest. This trend may last for many months, may be for years.
Ravi Mehta is an Auckland based Financial Advisor and can be contacted on ravi.mehta@pfsl.co.nz. A disclosure statement as required under Securities Act 1988 is freely available on request.