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Mortgage Rates Lower in Australia than New Zealand despite very close funding rates.

An unusual similarity in Australian and New Zealand interest rates is causing us to question this: ‘Why are mortgage interest rates so much cheaper in Australia than New Zealand’?

The Australian Cash rate is currently at 1.5%, whilst the New Zealand Official Cash rate is a wee bit higher at 1.75%. These are the Government structured interest rates that they use to lend to commercial banks day by day. A more indicative rate for the underlying interest rates are ‘swap rates’ which are the funding mechanisms for Banks and an indication of term interest rates.

In Australia the 1-month swap rate is 1.85% whilst in New Zealand the rate is 1.80%. This will give an indication of the funding costs for floating rate mortgages. The two-year swap rate is 2.00% in Australia whilst in New Zealand the rate is 2.01%

Near Identical Funding rates, so perhaps we should be seeing near identical Mortgage rates? Well no, not by a long shot. New Zealand Banks are charging Kiwi’s higher rates for their mortgages and it is hard to understand why this is happening.

In Australia the Floating rates are much lower with 3.79% available, whilst in New Zealand 5.73% seemed the best carded rate. I used the online rates available on comparisons websites for the largest four Australian Banks. These largest Australian Banks ironically own the largest four New Zealand Banks, which I also used for this sample. The best 2-year rate in Australia was shown to be 3.75% whilst, in New Zealand from the top 4 Big Banks it is 4.29% today.

There are many varieties of mortgage available making a simple comparison complex, some requiring higher deposits or multiple accounts with the Banks, yet the trend seem clear, Kiwis are paying more for their home loans.

The home loan market in Australia seems much more competitive, with many smaller players competing with the Big Banks. These smaller players in Australia generally have even better carded rates that the big banks and seem more aggressive on lowering fees. Something useful when comparing Australian mortgage rates is a ‘comparison rate’ that also factors in potential fees along the lifetime of the loan.

It also may be argued, that New Zealand is a smaller and therefore riskier place to lend to and therefore needing a higher interest rate to compensate. One arena to quantify this risk is the yield or interest return on Government Debt. Paradoxically, the 10-year return on Government debt in New Zealand is 2.56% which is a wee bit lower than 2.61% for Australian Government debt. This indicates that investors need a tiny bit higher return to hold Australian Government Debt than New Zealand.

There are many complexities that come into the funding and lending models from Banks, with complex ratios and reserves needed to perform the service and Australia, also New Zealand’s Reserve Banks may approach this differently. It’s hard to understand if this can translate into a significant difference in mortgage rates though, especially as both jurisdictions are governed by the International banking reforms tied up in the international Basle banking accords.

Whichever way we examine the bank accounts or risk in both countries, it seems clear that the Australian banks are enjoying more margin or profit on their New Zealand Customers.

James Sheridan

James Sheridan BA (Hons) Economics | FSP107364



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