When will mortgage wars end?

Aggressive price competition for mortgages may come to an end soon as the Reserve Bank's new capital rules kick in, according to a report from KPMG.

Wednesday, February 19th 2020, 11:43AM

The advisory firm's Financial Institutions Performance Survey 2019 suggests the RBNZ's new capital regime could prompt an end to the "mortgage war" triggered by OCR cuts last year.

“For riskier clients in particular, rates will likely increase and loan covenants may become more restrictive, or in more severe cases the bank may discontinue funding,” John Kensington, KPMG partner and author of the report said.

The report suggests last year's OCR cuts, notably the 50 basis point cut last August, gave banks more "wiggle room in their margins to drop rates and compete on price and volume". It described the resulting mortgage war as an "unintended consequence" of the rate cuts, "just after house prices had stabilised".

KPMG's report says competition is fierce among banks as customers increasingly shop around for the best rate.

"Banks have acknowledged that customers are price-conscious and in a time when consumer loyalty is low, an attractively-priced mortgage rate is often what is required to grow mortgage books."

However, KPMG says the good times could be coming to an end for borrowers.

"The historically low interest rates mean that it is an undeniably good time to have a mortgage, but it is unclear how long these rates will stay so low. Mortgage holders need to be prepared to adjust to higher repayment values when interest rates rise."

The report predicts upward pressure from the central bank's new capital rules.

"There is the general expectation that the increased capital requirements will put upwards pressure on interest rates as banks look to increase capital reserves. In a time when the housing market is elevated, a small increase in mortgage rates may just be the right sized stone to crack the ice, although the intense mortgage wars do provide a slight buffer in preventing increasing interest rates slowing the housing market."

Tags: KPMG Mortgage Rates mortgages