Here’s why one former banker thinks the rip-off is not mortgage rates, but deposit rates

Rising mortgage rates have fuelled anger at massive bank profits, but it’s low deposit rates that are really fuelling their profitability.

Calls for a Commerce Commission market study into competition has focused on home loan rates, which have risen fast as the Reserve Bank Te Pūtea Matua has lifted the official cash rate (OCR), causing households to really feel the pinch.

Former banker John Bolton, chief executive of mortgage broker and lender Squirrel, says: “When we talk about bank profitability, we gravitate to home loan rates, which is natural because that’s the thing we are obsessed with.”

But he says the $346 billion residential property mortgage market is competitively-priced.

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“Kiwis are getting a very, very good deal when it comes to their residential mortgage,” he says.

“That’s not where the issue is,” Bolton says. “It’s the savings accounts.

“Mortgages is very price-sensitive. People will move lender for very small differences in rate,” he says.

But, he says, where banks aren’t competitive is where customers are not price sensitive, such as on personal loans, credit cards, and deposit accounts.

“People won’t go and shift credit cards for a 1% difference in rates,” he says.

“Depositors are much more concerned about the safety of their money than rates,” he says, especially as many older depositors remember losses from financial company deposits.

Figures for the end of January show banks had $227 billion of deposits from households.

But its figures also show that deposit rates haven’t risen as fast as the OCR despite a large amount of it being either on-demand money, or only fixed for six months or less.

In February 2021, when the OCR was 0.25%, the weighted average price for six-month deposits was 0.85%.

In February 2023, after the OCR had risen from 0.25% to 4.75%, the weighted price banks were paying for six-month money was 4.79%.

The gap between those deposits and the OCR narrowed from 60 basis points to just four basis points.

There was a 394 basis point increase in six-month deposit rates compared to a 450 basis point increase in the OCR.

However, while depositors didn’t get the full benefit of rising interest rates, borrowers didn’t get the full pain from them.

Six-month home loan rates rose 3.24% to 6.57% by 333 basis points, Reserve Bank figures show.

“Borrowers have benefited from this,” Bolton says.

“As much as savings rates haven’t gone up, it hasn’t all gone to bank profits. They are using it to compete on mortgages,” he says.

But it is also a big part of the reason why banks’ net interest income has increased so much, says Bolton.

Net interest income is the interest income a bank receives minus the interest it pays for borrowing from retail depositors and wholesale investors.

Some kinds of deposits have fared worse than others.

Transaction accounts often pay zero interest, and in November last year Bank of New Zealand (BNZ) even told its shareholders that customers helped it earn a record profit of $1.4 billion by leaving their money in low, and no-interest accounts.

At the time, its chief executive Dan Huggins said: “Pre-Covid around 58% of customer deposits were in term deposits. That fell. It’s around 38% now.

“We would expect that to reverse, and for customers to move from those on-demand products to term deposits.”

Rises have been even lower for some forms of savings accounts, like bank online call accounts. In February 2021, rates on these accounts were between 0.05% and 0.3%.

They are now between 1.8% and 3.85%, with ANZ paying just 1.95% on its online savings account.

Some accounts are also “bonus” savers, where people have to make savings each month, or leave their money untouched, in order to earn the full rate.

But the “base” rate for bonus saver accounts is low, while the “bonus” rate is high, ensuring a portion of people miss out on the full interest.

ANZ’s Bonus Saver pays a base rate of 0.85% and a bonus of 2.5%, if the savers make no withdrawals and deposits $20 or more on or before the last business day of the month.

Even children’s accounts have risen only by a small amount. ASB’s Headstart Account was paying 0.15% in February 2021. Now it’s paying 3.15%, having risen by 300 basis points.

“Banks exploit the inertia of New Zealand depositors,” says Squirrel’s chief executive David Cunningham.

2degrees founder Tex Edwards thinks this inertia can be tackled on two fronts.

Edwards published his own draft terms of reference for a competition probe of banks in a bid to get the Government to order one, and is sceptical of National’s desire for a “short, sharp” select committee inquiry.

One of the key things that needs to be investigated is bank account portability, Edwards says.

In the world of telecommunications phone number portability – the ability for a person to take their phone number with them when they shifted from one telco to another – was only won after a long battle.

“It was first mentioned in 1996,” Edwards says, but was rejected by the then-National Government led by Jim Bolger, and only introduced in 2007.

If people could simply switch their savings, or term deposit, to another bank by providing the new bank with their account number, and proof of identity, it could inject more competition into the bank deposit sector, Edwards thinks.

A second thing that could change that would be to follow the European Union’s 2012 move to introduce open-banking, which is a term used for allowing technology companies to develop services that allow people to pick and choose the services they get from banks.

This could inject new competition into the banking sector, and enable new companies to compete efficiently with the giant incumbent banks

In December 2019, then-Minister of Commerce and Consumer Affairs Kris Faafoi, who has now left government to become a political lobbyist, sent a letter to banks telling them he was concerned the banking sector was not being quick enough to embrace open banking.

This letter is a “smoking gun”, says Edwards.

Late last year, the Government lost patience and said it would legislate to require banks to engage with open banking, with then Commerce and Consumer Affairs Minister David Clark saying: “Open banking ensures banks must share customer information if they request it, making it easier for New Zealanders to compare mortgage rates, apply for loans and switch banks.”