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The power of financing

Ultra-low mortgage lending rates and a sustained programme of fiscal stimulus from the globe’s central banks kept economies afloat and owners in homes during the darkest days of the pandemic.

But over the last 18 months, the hard work has really begun as policymakers battle to close Pandora’s inflationary box, with broad effects for borrowers.

Sam Stepney, head of strategic partnerships and activation at financial advisory firm Vega Mortgages, says New Zealand’s Official Cash Rate (OCR) is now at the highest level it’s been in 14 years, with many Kiwis needing to make some tough choices as the cost-of-living crisis continues.

“Economic uncertainty and the Reserve Bank’s (RBNZ) tough talk on inflation have seen Kiwis shy away from residential purchases over the last year, as higher mortgage lending rates remain the most significant drag on market activity.

“Though the winds may be shifting on real estate turnover, with wholesale lending rates – which dictate local mortgage rate offerings, and inflation data tracking lower in recent weeks,” she says.


Determined by supply and demand market forces, wholesale interest rates are the rates at which banks and other financial institutions lend to each other in the wholesale money markets.

In many cases, and particularly in New Zealand, which has a relatively small, open economy, overseas interest rates set the base for our mortgage rates. When global wholesale rates move, this influences the cost of funding for New Zealand lenders.

This has been a key determinant of recent market activity as central banks raised cash rates internationally to quell inflationary pressures and dampen consumer demand for goods, services and assets like residential property.

However, recent bank failures in the United States and weak domestic growth have contributed to a natural contraction of credit conditions, meaning wholesale interest rates have fallen 50-70 basis points (bps) over the past month.

Ms Stepney says this was a critical factor in the RBNZ’s surprise decision to raise the OCR by 50bps (0.50 percent) in its April Monetary Policy Statement (MPS).

“The recent decline in wholesale swap rates was beginning to manifest as downward pressure on mortgage lending rates, which in turn necessitated a larger-than-expected rise in the OCR, for the RBNZ to maintain current lending rates and keep a grip on inflation.”


Despite the still-rising OCR, New Zealand’s lending institutions are becoming increasingly competitive as they work harder to win new lending business amid lower real estate turnover.

The some $6.6 billion worth of new mortgage funding advanced in New Zealand during the first two months of 2023 is less than half the nearly $14 billion provided during the same period in 2021 when the housing market was riding high.

“Lenders are becoming more competitive to attract new business and retain existing customers, which may well open the door for mortgage lending rate reductions in the not-too-distant future.

“The major players are keen to maintain their market share, particularly in the refinance market where approximately 55 percent of fixed mortgage debt is due for refixing within the next year.”


Giving greater cause for optimism, particularly for entry-level and leveraged borrowers, the government recently announced a suite of additional reforms to the beleaguered Credit Contracts and Consumer Finance Act (CCCFA).

Ms Stepney says the new changes, effective 4 May, are a positive move for the banking environment, as discretionary spending is removed from affordability testing criteria.

“Living expense benchmarks are being softened, and only expense essentials to the wellbeing of the borrower and families are necessary to include in finance applications – meaning, borrowers will no longer be judged by their daily coffee purchases.

“Potentially, an approved loan amount could be more than previously thought, and, more importantly, a realistic approach to expenditure is being taken into account.”

The announcement has seen some commentators anticipate a flush of buyers to the market, encouraged by a more flexible attitude by banks. This aligns with anecdotal evidence that mortgage approvals are being provided quickly and efficiently, easing the backlog that hampered residential sales activity during the recent days of high demand.

For the months ahead, Ms Stepney expects the economic environment will continue to influence residential market activity. However, only a few homeowners are under financial pressure to sell, and several key supportive factors indicate we may well be treading down the path of a residential real estate recovery, driven by greater certainty in the mortgage lending arena.

Sam Stepney is head of strategic partnerships and activation at Vega Mortgages, Bayleys’ preferred full financial advisory business, which offers core solutions and expertise in residential mortgage lending, personal insurance, business and commercial lending, KiwiSaver and asset finance.

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