So why can the US do 30-year fixed home loans and we can’t?
The major difference, particularly in a small economy like New Zealand, is that interest rate risk for these longer terms is particularly tricky to manage given the lack of depth in our wholesale markets.
The duration of an interest rate is a risk – if it is set for three months, a year, it is much less risky than 10 years or 30 years. Just think how much things change over decades!
That means in economies like New Zealand and Australia not all interest rate risk can be hedged. And if it isn’t hedged, there’s a danger a bank may be in trouble when rates change.
In the US, there are investors prepared to ‘buy’ that long term risk off banks. US banks typically on-sell their mortgages to two government-sponsored funding vehicles – Fannie Mae and Freddie Mac – which adds yet another dimension to the US housing market we don’t have here.
These institutions have been set up by US governments specifically to hold these long-term loans, protecting banks and the broader financial system. Again, New Zealand is not big enough to have the same institutions.
Let’s also not forget a 30-year fixed-rate loan could also be riskier for borrowers.
Rates can fluctuate wildly over such a long period and there are usually costs associated with paying out a loan early. These could be significant as rates can move a long way in five, 10, 15 years from when the loan was first drawn.
It’s also rare for a Kiwi’s circumstances to stay the same for 30 years.
For example, a change in relationship status, illness or even just wanting to downsize could mean a customer wants to break their loan early. Currently, around 1 in 200 fixed loans are repaid early each month.
So, while it’s a valid question to ask why we can’t have 30-year home loans in New Zealand, hopefully this provides some context.