Mortgage scrap: TSB slashes one-year fixed rate to 4.85%

One of the country’s banks is slashing its one-year fixed rate to 4.85% as the fight to retain and attract new customers heats up in a shrinking mortgage market.

TSB has this week launched a special one-year fixed interest rate of 4.85% for home loans - half a percentage point less than some of its larger competitors – for borrowers with a minimum 20% deposit.

The discounted rate undercuts the special one-year fixed rates offered by other banks that hover between 5.15% and 5.35%.

At the time of writing, ANZ’s, BNZ’s and Westpac’s special one-year fixed interest rate for borrowers with a minimum 20% deposit sat at 5.35%, ASB’s was 5.25%, Kiwibank’s was 5.19% and SBS Bank’s was 5.15%.

Recent figures from the Reserve Bank show that the total amount of money lent has dropped significantly, with $6.8 billion lent out May 2022 - a whopping 29.3% down on the same period last year when banks lent out $8.9b.

TSB's rate slash comes after other banks moved away from competing on interest rates and instead offering hefty cashbacks as a way of luring customers in.

Reserve Bank of New Zealand figures show that lending dropped from $8.9 billion last May to $6.8b this year. Photo / File

Earlier this month BNZ announced it would give 1% of the value of a new home loan or up to $20,000 back to people who took out a home loan with them.

Kiwibank offered a similar sweetener, promising to give 1% of the new home loan as a cash contribution up to $10,000. Both banks have conditions on minimum loan sizes and require at least 20% equity.

EasyStreet Mortgages mortgage adviser Gareth Veale said while TSB’s 4.85% interest rate was a “carrot to get you in the door”, people also needed to think long-term and beyond the one-year rate.

“Yes, you might get a good one-year rate, but you would get a lot less cash.”

“As a customer, don’t necessarily be attracted to the shiny object given by one bank because generally when there’s one shiny object there’s usually another shiny object somewhere else. So, talk to your broker to understand the other specials that are out there at the time.”

Veale said all banks were offering various amounts of cashbacks and it was also possible to negotiate with some of the large banks on the interest rates.

“It’s got a four in front of it which is quite nice, but in reality, the one-year rates with negotiations isn’t that much above five [%] anyway,” he said.

CoreLogic chief economist Kelvin Davidson is not ruling out mortgage rates going back up again. Photo / Peter Meecham

Opes Partners resident economist Ed McKnight expected banks were getting competitive to retain and attract customers due to the decreasing volume of new mortgage lending.

“I think particularly the banks will be pursuing refinance [deals]. For instance, if you have a mortgage and you are currently with Westpac then BNZ might come out with something to entice you to move your mortgage across to them.”

McKnight said it wasn’t unusual to see smaller banks like TSB, HSBC, SBS Bank and Heartland Bank use interest rates to compete because they had a smaller market share.

However, he warned that people who were tempted to switch banks for large five-figure cashbacks should figure out all the cost. He said legal fees are usually between $900 and $1200 to switch a mortgage and borrowers usually had to commit to staying with their new bank for two to three years.

“It’s something people miss all the time. They see the $4000 or $3000 they are going to get and they’ve already spent it on a new TV in their minds.”

CoreLogic chief economist Kelvin Davidson said banks had been dropping their interest rates and several weeks ago some banks including ANZ reduced its two-year fixed interest rate.

With just under 50% of borrowers due to refix their mortgages in the next year, he said it was not surprising banks were focusing on keeping their existing customers and luring customers from other banks.

And while interest rates have waivered over the past few weeks, Davidson did not think they had reached the peak just yet, but didn’t think it was too far away.

“I wouldn’t rule out mortgage rates going back up again.”

He predicted a high equity one-year fixed rate could peak between 5.5% and 6% later this year.

“People probably are still fixing for relatively short periods and I think there’s a reasonable chance that works out well because interest rates could come down again in a year or two.”