Variable home loan rates are still some of the most expensive on the market despite a steep drop in fixed rates over the past few years, and Simplicity managing director Sam Stubbs says there is no reason for floating rates to stay so high.
Non-profit KiwiSaver manager Simplicity recently started offering its 2.25% floating mortgage rate to all of its members - the lowest currently on the market - and Stubbs says main banks should be significantly lowering their variable rates too, as almost all of them are currently well above 4.00%.
“For us, we’ve always had that 2.25% rate available,” Stubbs explained. “But what we announced was a pretty dramatic expansion of the mortgage lending programme.
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“Previously, members had to go into a ballot and get selected, but now we’ve opened it up to all of our members. Anyone can apply for a first home mortgage at 2.25%, and that’s meant a significant increase in the number of pre-approvals and mortgages.”
“This is something the banks could and should be doing, but they’re not,” he added.
“Mortgages could be significantly cheaper - 2.25% is at least 2% cheaper than any other bank, and there’s no logic as to why they should be so high. But people get used to things, and we’ve gotten used to this idea that floating rate mortgages should be significantly more expensive than fixed-term mortgages.”
Stubbs says part of the reasoning is likely that banks are keen to have customers committed for a longer period of time, and thus offer more enticing longer-term, fixed mortgage rates. He says that despite Kiwibank’s recent move to lower its floating rate, there is still room in the market to make variable rates significantly more affordable.
“Banks would certainly like to have customers committed for longer, and that’s one of the reasons why floating rates have stayed at that level,” Stubbs said.
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“There’s also less capital required by the bank against a floating rate mortgage, but that in no way explains the 2% difference in rate. They do it because they can, and because they would like to have people ‘termed up,” so I’m looking forward to a chief executive justifying that rate.”
“It was interesting to see Kiwibank drop its floating rate down to 3.40%, and even that’s too high,” he concluded.
“When we looked at it, we decided to charge what we thought was a fair rate for our investors and borrowers, and that came out as 2.25%.”