New Zealand Witnesses Record Low Mortgage Rate - Price War Trigger Insinuated?

  • May 09, 2020 NZST
  • Team Kalkine
New Zealand Witnesses Record Low Mortgage Rate - Price War Trigger Insinuated?

The global economy is experiencing a brutal downturn as nations seek to contain the novel coronavirus. While lost jobs and a sharp rise in unemployment are a cause for worry, containment measures seem to be gradually reducing infection rates in several countries. Owing to large fiscal packages, and significant easing in monetary policies, possibilities of a recovery in the global economy seem possible, though difficult.

Noticeably, financial markets across the globe have been working more effectively than they were a month ago. The economic downturn caused by the COVID-19 pandemic translates into difficult times for bank customers. Banks feel obliged to help customers manage home loans, and in New Zealand, ASB and Kiwibank have recently taken the route of slashing interest rates to record lows to aid New Zealanders with home ownership.

ASB and Kiwibank Rate Cut

ASB and Kiwibank have slashed mortgage rates to a record low of under 3 per cent in an attempt to heal the extraordinarily stressful time for Kiwis- marking a new record low for major banks in New Zealand.

ASB’s cut includes the two-year special rate at a low level of 2.99 per cent per annum. Effective from 8 May 2020, the rate cut indicates a sixty basis points decrease on the old price. The 18 months special home loan rate was also slashed down by 50 basis points to 3.25 per cent. The 24 months special home loan rate is reduced by 40 basis points to 2.99 per cent. Besides this, the bank has put in several support options that include interest-only payments and mortgage repayment deferrals.

On the other hand, effective from 11 May 2020, the state-backed Kiwibank has cut its one year special to 2.99 per cent demonstrating a slump of 10 basis points from the previous 3.09 per cent offer. This also marks the first ever sub 3 per cent home loan interest rate for the bank.

The cuts by both the banks were introduced after wholesale interest rates started to price in additional OCR cuts by year end.

How Will Rate Cuts Help Bank Customers?

When the economy is in a dwindle, every bit helps to some degree. Globally, banks have been thriving to support the financial wellbeing of their customers. The move of both the New Zealand banks in discussion is being viewed as their way of providing value to customers wherein they have the option to pay off their loan faster or keep that money in their pockets amid the current financial crunch. Experts view this as cold comfort for the Kiwis who have deferred payments on their mortgages as they cannot afford them at the moment.

Low rates are expected to help borrowers navigate through what can be referred to as the new global financial crisis. It can put cash into the pockets of the mortgage line, consequently propelling the economy to accelerate and restart. Moreover, lower borrowing rates are likely to help in further easing of financial concerns that borrowers are likely to face during COVID-19 crisis times.

It should be noted that a low rate regime is often regarded as welcome news to first home buyers who are on a verge to embark on their home ownership journey.

Has a Price War Been Triggered Due to the Rate Cut?

It is evident that New Zealand currently is witnessing a very competitive banking environment in the housing market. Even when banks are aiding customers, they seem to be attracting people away from other banks in what is being tagged as a price war as banks race to match rates.

ASB’ and Kiwibank’s move has also kicked off a new sub-3 per cent price war during the COVID-19 crisis as it lays pressure on other banks to match the same rates.

COVID-19 Situation in New Zealand

A country of almost 5 million, New Zealand has reported less than 1.5k virus infections and 21 deaths. The country has administered over 175k tests to ensure the safety of its citizens. On some days of this week, no new cases have been reported.

As on 8 May 2020 (09:00 AM NZST), New Zealand is at Alert Level 3 and number of confirmed cases in the country are 1,490 with 21 deaths reported. Fifteen recoveries have been made in the last 24 hours. On 11 May 2020, a decision will be made on whether the country will move to Alert Level 2 or not. The day will mark the end of a two-week life cycle and be a period of transmission of the virus.

One of the most successful economies to flatten the curve, New Zealand has been successful in containing the spread of the virus to commendable degrees, at the back of bold guidance from PM Jacinda Ardern, imposing a timely and one of the strictest lockdowns the world saw amid the pandemic situation, and launching the world’s most stringent border restrictions.

Currently, the Government is well advanced in its plans to get New Zealand moving and grow in the wake of COVID-19. With the Budget to be updated in less than a week, and a decision to move to Alert Level 2 to be out soon, it will be interesting to gauge the outcome of Government moves and bank initiatives to help New Zealand achieve normalcy soon and an amiable post-COVID-19 environment.


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