Do Australians get a better mortgage deal?

Do Australians get a better deal on their mortgage rates?

If you're part of the small proportion of New Zealanders who prefer a floating rate, the answer is probably yes. But if you prefer a fix, it's probably no.

Floating rates across the ditch are lower than what New Zealanders pay.

While the cash rate is 4.35 percent, Commonwealth Bank was this week charging 6.34 percent for a variable rate and ANZ was advertising 7.4 percent.

But fixed rates don't look so competitive. On Friday, Macquarie was offering a two-year rate of 5.39 percent for two years and Westpac 5.89 percent, while ANZ was offering 6.54 percent.

In New Zealand this week, the cash rate was 5.25 percent and ASB was advertising a variable rate of 8.39 percent and ANZ a two-year rate of 5.69 percent.

Commentators said the difference was probably driven by the cost of funding.

KPMG banking expert John Kensington said while the current margins on fixed lending looked much larger in Australia, an aspect of that would be the forecast track for interest rates.

"I think what they're thinking is maybe by then the time they get out there the rate they borrow at might have changed."

New Zealand is predicted to have a sharper fall in the official cash rate, sooner, than what is likely in Australia.

He said borrowing in both countries may have been done in a foreign currency with a swap that could have locked rates in.

"The true cost of the Australia borrowing in the future to fund those mortgages may be derivatives or swaps to hedge those- I think that's what's going on. There are two different expectations in market."

Squirrel chief executive David Cunningham said there were also competitive pressures.

Because very little lending was done on fixed rates in Australia, it was the floating rate that would be the focus for most borrowers - and where banks would compete the most.

"The two-year swap rate in Australia is 3.6 percent, which is similar to NZ.

"For example, their 90-day wholesale rate is 4.45 percent and the best floating home loan interest rates are around 6 percent. So there are much tighter margins on the 90 percent-plus that goes into floating rate home loans."

While it is fixed rates that are more competitive here, Cunningham said compared to wholesale interest rates, fixed rates in New Zealand were still "way higher" than they should be.

"Historically, over the last decade or so, the margin has been between 1 percent and 1.5 percent. Right now the margin for the popular one-year term is around 2.25 percent in NZ."

But he said compared to retail interest rates that banks were paying, the margin was quite low.

"Today most banks are paying about 5.7 percent for six-month term deposits, but the wholesale rate for six months is 4.6 percent, so that's a negative margin of 1.1 percent. Offset that against the 2.25 percent wholesale margin, and you're down at a 1.15 percent margin. And for the popular one-year terms, margins are pretty narrow compared to the last seven years.

"However, when you look at bank funding, they have $37 billion of 0 percent interest transaction account balances and $75 billion in savings account balances at an average 3.7 percent interest rate. At the moment that's resulting in banks earning a net interest margin of around 2.4 percent vs. pre-Covid levels of about 2.0 percent."

He said the margin on floating interest rates was very wide and had been that way for almost 30 years.

Only about 10 percent of New Zealand home loan lending is floating.

"But at a typical carded interest rate of 8.4 percent, the margin is huge by any international comparison. Kiwi borrowers are paying at least $400m more interest on floating rate loans than what might be considered a fair margin."

ANZ said the reason that rates were different was that Australia and New Zealand had unique interest rate environments.

"In order to compare what New Zealanders are paying compared with Australians it is best to consider the differences in net interest margin.

"This is because a proper comparison requires consideration of both sides of the balance sheet: what is paid to depositors and what is charged to borrowers. The cost of lending might be higher in one country, but the rate paid on deposits might be higher.

"ANZ NZ division's net interest margin (NIM) of 2.56 percent for first half FY24 relates to the New Zealand personal and business and agri businesses and is comparable to the combined margin of ANZ's retail and commercial businesses in Australia, which is 2.52 percent. This difference is more than explained by the higher levels of capital ANZ must hold in New Zealand."

Research showed that last year, for the industry as a whole, Australian banks had a net interest margin of 1.85 percent compared to a margin in New Zealand of 2.34 percent.