Here’s why US home loan borrowers can fix for 30 years, and we can’t

With a 15-year fixed rate home loan from US bank Wells Fargo, a borrower could lock themselves in an interest rate of 5.5%, and get on with paying their loan off.

The very longest fixed rate offered in New Zealand by the country’s largest bank ANZ is a five-year loan for 7.09%​, and ANZ’s popular two-year rate for people with at least 20% equity in their homes is 6.45%​.

And unlike in New Zealand, fixed rate mortgages in the US don’t come with huge break fees if you want to make a change so people aren’t worried about fixing for longer, says Susan Templeton​, a mortgage broker in Auckland who worked for more than a decade as a broker in the US.

Competition is so fierce over there she had 300​ lenders fighting to lend to her clients.

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New Zealand has five large mortgage banks, and around 30 other much smaller mortgage lenders, including smaller banks like TSB and Heartland.

But Sam Stubbs, founder of Simplicity KiwiSaver, believes competition could be brought to the New Zealand home loan market, if politicians force mandated bank account and mortgage account portability, so people could easily shift between banks.

“You should be able to switch your mortgage as easily as your KiwiSaver,” he says.

The spotlight is being shone on the home loan rates New Zealand borrowers pay, with rising calls for the Commerce Commission to undertake a market study similar to the one on the grocery sector which resulted in moves to inject competition into the supermarket sector.

Prominent businesspeople including Stubbs and Tex Edwards, founder of 2degrees, are campaigning for Minister of Commerce and Consumer Affairs Duncan Webb to order the commission to begin probing the banking sector.

So fierce is the competition in the US mortgage market, that the Wells Fargo 5.5% rate is just 75 to 100​ basis points above the US Federal Funds Rate target range of 4.5% to 4.75%​ set by the Federal Reserve, the US equivalent of New Zealand’s Reserve Bank Te Pūtea Matua.

The ANZ 7.09%​ five-year rate is 234​ basis points above the Reserve Bank’s 4.75%​ official cash rate.

Templeton, from Niche Mortgages in Auckland, says those long-term American mortgages allow people to lock in rates, and then get on with paying their home loans off without worrying about the threat of having to refix in just a year or two.

Wells Fargo’s 30-year fixed rate loan is 6.375%​.

There’s such a vibrant market that when someone breaks, and repays a loan at their bank, it just lends the money to someone else, she says.

“You just have the competition between banks and investment companies clamouring for your business,” Templeton says.

Stubbs says New Zealand politicians should outlaw, or cap break fees, which banks say compensate them for interest they would have been paid under the fixed-term contract the borrower signed up for.

“They are completely fake because what happens is the bank charges the break fee, and then takes all the money that has been paid back, and then lends it again to someone else.

“They are double-dipping on interest,” he says.

Stubbs says government should shoulder a lot of the blame for New Zealand’s short-term home loans culture.

He says New Zealand does not finance the country’s national debt using long-term bonds. That leaves banks and investors without a long-term finance rate which they can use to price long-term home loan rates.

“The majority of our mortgages should be five to 10 years, not one to two years,” he says.

There are some other marked differences in US home loans.

There are “conforming” and “non-conforming” loans, which are terms referring to whether loans are eligible to be government-guaranteed.

And there are special lower-cost home loans for military people, and people in some rural areas.

Not everything about the US mortgage market is great, however, says Templeton.

On some fronts, New Zealand banks are much better than their American peers.

She says when people borrow from New Zealand banks they enter a genuine “partnership”. The bank keeps home loans on their books, and under hardship laws, they have to treat customers decently.

Not so US banks, she says.

The US has a huge securitisation market, with banks selling off their home loans to investors. That reduces banks’ interest in even speaking to borrowers who run into trouble on loans, she says.

Often, people don’t even know who owns their home loan, she says.

But Stubbs says the lack of real competition here is shown by the constant, nearly unbroken rise in net interest income banks had been earning.

Net interest income is the amount of interest collected by banks on the debts their customers owe to them, minus the interest the banks have to pay to depositors and wholesale funders.

He says New Zealand needs to “take its finger out of the dyke”, and allow open-banking, which would make it much easier for people to shop around for loans, and also to allow new lenders to enter the market efficiently.

CORRECTION: An earlier version of this story referred to a percentage point difference, rather than basis points.