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Bank offer – good deal or gimmick?

Finally the spring offers banks usually make are now happening as the traditional house hunting season gets into full swing.

Last week ASB and Sovereign came out with a two-pronged offer that included a Galaxy Tablet as an inducement to come on board and perhaps more importantly, as an inducement to stay. Looks to me like they’re as keen as the others to attract new business but trying to do something about it disappearing straight out the back door.

As far as the offer being an inducement to stay is concerned the deal is you get the tablet if you take a fixed rate of 3 or more years in duration and fix at least $100k. The trick is that you have to take the advertised rate, you can’t get a discount AND a tablet.

Will it work as a retention tool? I don’t think so, at least not as well as they’d like.

Certainly the feedback I’ve been getting from my own clients is that the rate is more important with one describing the tablet offer itself as “a gimmick”. The reality is that people are pretty savvy and with an offer like this you have to wonder if ASB have underestimated their own customers.

Let’s put some rough numbers on it:

Assume a mortgage of $400,000 at the advertised 3 year fixed rate of 5.90%. The interest cost on that is $23,600 each year. The same loan without the gadget but with a discount to say 5.65% gives $22,600 in interest a year. It doesn’t take a rocket scientist to see the difference in the first year is more than the retail price of the gadget at Noel Leeming! The saying ‘there’s no such thing as a free lunch’ seems to ring true here!

As I said above, most of the people I’ve spoken to last week can see better value in arguing for a discount and have instructed me to enquire on that basis. I bet there will be others who love the idea of a tablet in exchange for fixing but the reality of many households out there is this – yes a gadget would be nice but they’re more interested in the effect on their wallets.

 

Floating not the only option

Everyone knows staying on floating is the best thing to do at the moment, right?

Maybe. Maybe not.

This week the Reserve Bank (RBNZ) kept the Official Cash Rate (OCR) on hold and signalled no increase in this rate until next year, thanks in large part to the problems in Europe where the economy seems to be stumbling and lurching like a drunk teenager on a Friday night on Queen Street. Sounds like a good reason to stick with the floating rate, right? Read on…

NZ banks make a fatter profit margin on floating rate mortgages than fixed rate mortgages. That’s the main reason why the standard floating rate is higher than the 1 and 2 year fixed rates. If you compare to the wholesale money market which is where banks source much of the money they lend out, floating rates should be lower. Herein lies the reason banks have the ability to reduce the floating rate they charge you (if you put up a decent argument and ask nicely).

Another thing to be aware of is that when rates do start to move up (as they inevitably will), the fixed rates will rise before the floating does. This is because fixed rates are based on what is likely to happen in the future (2-5 years out) whereas floating rates tend to be focussed more on where the RBNZ sets the OCR and that’s a shorter term thing.

And it may not pay to wait until the last minute before you fix, because I think the fixed rates could increase suddenly and sharply, rather than slowly and gradually. At the moment about 2/3 (or about $100 Billion dollars) of NZ mortgages are floating, far more than has been the norm over the last 10 years.

My guess is that at the first sign of an increase in rates the banks are going to be faced with literally tens of billions worth of floating mortgages looking for a fixed rate home. While banks do have pots of money to lend only so much is available on a fixed rate and economics 101 tells that if you get huge demand for a limited supply of something then the price of it goes up. In fact we saw a mini version of this at the end of 2009 as everyone rushed for the door and all fixed rates spiked.

With the Christchurch rebuild finally getting underway, Asia still growing despite the chaos in Europe and the US economy showing some signs of recovery, there is a reasonable chance that the NZ economy will begin to recover sooner than predicted taking interest rates with it.

We totally think people on a floating rate right now should be having the conversation about how a fixed rate might benefit them (or not, as the case may be). Have a chat, understand the pros and cons as they relate to you and be ready to move if you need to.

Please remember that my comments are general in nature and no substitute for advice about your own circumstances. Do not hesitate to give us a call to talk through your personal situation.

DM

 

Westpac say fix, ANZ say float

Last week the RBNZ Governor kept the Official Cash Rate unchanged – no surprises there. However he also reduced their forecast of future rate rises. This is something the market had predicted and we’ve seen the longer term fixed rates fall over recent months, somewhat to our surprise.  You’re now able to fix for 3 years at under 6%. One cause of this has been the strength of the NZ dollar – the high exchange rate has kept imports cheap and restrained the prices received for our exports – so helping to keep inflation down. And remember controlling inflation is the reason the RBNZ fiddles around with interest rates.

A recent NZ Herald article highlighted the fact that Westpac and ANZ have differing views going forward. ANZ’s Chief Economist foresees major risks for the NZ economy and so suggests you remain floating to see if rates fall further. But the Westpac Chief Economist thinks fixed rates are now so attractive that you should fix. He believes that it is risky to wait, as in the near future there may be a rush to fix which could drive up rates sharply, something that has happened before.

And which side of the fence are we on? Depends on what your situation is.

No that’s not me trying to dodge the question! To give you a real answer it’s best to understand your specific circumstances because the reality is some people should fix, some shouldn’t, others should do a bit of both.

David

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