NZ unlikely to get 30-year fixed-rate mortgages

Anyone who has lived in America for a long time can tell you about buying a home with a fixed rate mortgage that lasts 30 years.

Friday, October 21, 2022, 6:00 AM

Here in New Zealand, the longest fixed rate term is usually 5 years.

why the difference?

Luke Jackson heads the New Zealand branch of mortgage lender Regimac. He said in New Zealand he should definitely try a 30-year fixed-rate mortgage.

He said banks and financial firms had proposed protecting their exposure with 30-year hedging contracts with wholesale money suppliers, so it should be feasible.

But this is not done. No bank is interested in offering a fixed term of 30 years.

Some banks tried to offer 7-year fixed mortgages but backed out after failing to attract enough customers.

One banking expert blamed problems with the country’s “thin” financial markets.

“New Zealand banks do not have access to the level of wholesale finance required to cover 30 years of risk,” said an expert.

David Tripe, banking authority at Massey University, said borrowers in the country basically didn’t want long-term, fixed-rate mortgages.

However, a New Zealander who spent 20 years in the US real estate industry said 30-year fixed-rate loans are the norm in the US.

Hastings’ Richard Peach said these loans have real benefits for borrowers. Despite gaining that certainty, they weren’t bound by plans and could leave if they wished.

“If[interest rates]were lower, we could have borrowed from a different institution or even the same institution.
Lower level,” Peach said.

“It was a very flexible and desirable system.”

US banks regularly offer 30-year fixed-rate mortgages. For example, Citibank recently offered him one at 6.875%.
Adjustable rate, depending on the length of the period.

Peach said in some cases its 30-year fixed-rate mortgages are protected by additional insurance on top of regular hazard insurance. However, this is not universal and depends on the size of the deposit.

Special protections in the United States are, in some cases, federal involvement in mortgages, or mortgage securitizations that let other investors share the risk and share the risk.
merit. All these factors combined to make 30-year fixed mortgages a reality for banks and borrowers alike.

But Tripe was skeptical that this kind of hedging would work in New Zealand.

“The market[for hedging contracts]is very illiquid and it will be difficult to obtain hedges.
It wasn’t worth the time the banks were trying to hedge.

“Another thing about a fixed-rate 30-year mortgage is that it’s a table mortgage,” said Tripe Said.

“It means that the principals are always cutting back. So the amount that they have to hedge is constantly changing, and it’s very difficult to build it.”

An additional issue in New Zealand is the need for international financing of hedge contracts to protect 30-year mortgages.

John Kensington is KPMG’s Head of Banking and Finance and conducts regular analysis of the banking and non-bank lending sectors. According to him, the bank does on-lending in New Zealand, with 60% of its funding coming from offshore.

“They have to manage that risk, and if people want their mortgage rate fixed for 15 years, banks have to use some form of derivative[to protect it],” Kensington said. said.
Said.

“And no market is deep enough to allow banks to eliminate risk on the other side.”

Kensington added that offshore hedging of long-term fixed loans adds further complexity. This is due to exchange rate fluctuations that can reduce the value of the New Zealand dollar, making it even more difficult to achieve an effective hedge calculation than within a single country.

Either way, is the lack of a 30-year fixed-rate mortgage a problem for those facing mortgage coal? Not, according to Loan Market’s Bruce Patten.

“That’s not what New Zealand does,” he said.

“New Zealand has plenty of flexibility (the range of mortgage options). Few people take a five-year mortgage unless they are an investor.”

In other words, Patten found that people weren’t even interested in the long-term mortgages available in the current situation.

So if they don’t even want a 5-year mortgage, why bother taking out a 30-year mortgage?

tag: fixed rate mortgage

Comments from readers

No comments yet

login To add a comment