PHOTO: Antonia Watson, CEO of ANZ Bank New Zealand
Why Kiwis Can’t Have a 30-Year Fixed Mortgage: Understanding the Differences
Rising Interest Rates and Home Loans
With interest rates surging, many New Zealanders are curious as to why they cannot secure a 30-year fixed-rate home loan, a common practice in the United States.
Complexity of Fixed-Rate Loans
Antonia Watson, CEO of ANZ Bank New Zealand, sheds light on the matter, emphasizing that the situation is more intricate than simply desiring a long-term loan with a stable “2” in front of it.
Divergent Banking Practices
The primary reason lies in the fundamental differences between the US and other major economies like New Zealand and Australia. The majority of these economies, including New Zealand, do not offer multi-decade, fixed-rate loans similar to those available in the US.
The Challenge of Managing Interest Rate Risk
Watson explains the mechanics of banking, illustrating how banks borrow from depositors with floating interest rates and lend to customers at fixed rates. While this works well for short terms, it becomes riskier for extended periods.
Shortcomings in New Zealand’s Wholesale Markets
Due to the limited depth of New Zealand’s wholesale markets, managing interest rate risk for extended periods becomes challenging. Unlike the US, Kiwi banks struggle to find investors willing to assume the long-term risk associated with fixed-rate loans.
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Risk for Borrowers
Apart from the challenges for banks, Watson points out the risks faced by borrowers in opting for 30-year fixed-rate loans. Fluctuating interest rates over such extended periods and associated costs of early loan repayment can create uncertainties for borrowers.
Changing Circumstances Over Time
Considering the dynamic nature of life, Kiwi borrowers may find it challenging to maintain unchanged circumstances over three decades. Life events such as relationship changes, illness, or downsizing may necessitate early loan termination.
Institutional Differences
Another factor contributing to the unavailability of 30-year fixed-rate loans in New Zealand is the absence of institutions like Fannie Mae and Freddie Mac, which are dedicated to holding such long-term loans in the US, ensuring stability in the financial system.
In conclusion, while the allure of 30-year fixed-rate loans is understandable, the unique characteristics of New Zealand’s economy and banking system, combined with the challenges for borrowers, make it a complex proposition to implement such loan offerings.