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Look Below The Surface

Heartland’s one-year rate may seem impressive, but it needs to be seen in context, says John Bolton.

By: John Bolton

28 February 2021

It’s just a little bit odd at the moment trying to make sense of mortgage rates. The mortgage rate signals that borrowers are receiving are somewhat confusing.

Unemployment is well below what we expected. The economy and GDP are stronger than expected. The Government hasn’t had to borrow as much as they thought they would, and house prices are going up FAST. These factors should collectively point to higher interest rates and mortgage rates going up sooner than expected.

Some notable economists believe that New Zealand will be one of the first countries in the world to increase interest rates. Wholesale interest rates that determine bank funding costs have increased as much as half a percent, so rates look like they will increase.

But then HSBC has just dropped their mortgage rate special to 1.99%. Don’t think this is the start of a rate war and another cycle of lower rates because it isn’t. I predict that a large number of borrowers will miss the opportunity to fix at low, long-term rates by continuing to fixate on the one-year rate.

What Lies Beneath

Heartland Bank still has its “famous” 1.99% special. Whilst it made the news, Heartland has 0.10% market share of mortgages. To put that in perspective, that is one sixth of the market share of

‘Major banks which make up over 94% of the mortgage market are offering an effective rate of 1.59% for one year if you include cash backs’

Nelson Building Society. That hardly makes it “famous”. As I said in an article after they released their special: “If Heartland were a fish in the residential mortgage ocean, it would not even be a minnow, more like plankton.”

Heartland doesn’t offer cash backs with this rate. They don’t have a revolving credit product. It does not apply to companies or trusts, or townhouses or apartments, or anything in the provincial heartland. And they require 20% equity and a registered valuation, and you have to have your salary paid into a Heartland Bank account.

The big banks are offering cash backs up to 0.70% which is equal to 0.70% off the rate for one-year or 0.35% off the rate for two years. That’s equivalent to a rate of 1.59% for one year and that’s for all homeowners. So, our big banks continue to offer better deals than Heartland or HSBC, but that is missed by almost all journalists. The reason is that cash backs are not promoted or advertised and they are effectively used below-the-counter. HSBC is not dissimilar to Heartland with less than 1% market share. A global whale, but an undersized minnow in New Zealand. It is bigger than Heartland Bank but smaller than Co-operative Bank, one of our smaller community banks.

Why does one of the biggest banks in the world, that is offering a 1.99% rate not have more market share? For HSBC, New Zealand is a rounding error, so it gets no investment or focus beyond local management. It can be very hard to deal with, and I’d observe from what I see that it loses clients out the backdoor almost as fast as they come in the front door.

Now again let’s put some context around it: major banks which make up over 94% of the mortgage market are offering an effective rate of 1.59% for one-year if you include cash backs, and they have far superior products and services.

Don’t let the tabloid headlines mislead you and don’t get stuck with the plankton if you need a tuna. If you’re after some mortgage advice, we’re here to help. Give the team at Squirrel a call on 0800 21 22 30.

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