Floating mortgage margins need scrutiny

Federated Farmers intends to meet with the major trading banks to discover why there is a disparity between farm mortgage interest rates and residential home loans.

“Federated Farmers endorses the Reserve Bank’s view that the pricing of floating-rate mortgages is unusually high,” says Philip York, Federated Farmers economics spokesperson.

“We are seeking to meet with the banks to argue there is scope for immediate interest rate reductions, especially in the floating category.

“Given the Official Cash Rate (OCR) is currently 2.5 percent, floating mortgage interest rates should be closely aligned to falls in the OCR. But this latest Reserve Bank research has found otherwise.

“It is nonsense to argue farmers are not affected by this issue, when the Reserve Bank has now put its concerns in writing.

“With rural debt at $45 billion, every 1 percent of interest equates to $450 million that could be invested on the farm or used to repay debt. Although floating-rate lending is a relatively small proportion of the total debt, every dollar counts in the current economic climate.

“With no fixed rate safety net, those on floating mortgages pay appreciably more when interest rates are high in order to reap the benefits when interest rates fall. That’s risk and return, yet floating rate customers are seeing only a marginal benefit from the 575 basis points cut from the OCR.

“Farm mortgages are arguably the safest form of business to lend against. We look forward to discovering what proportion of banks’ farm business customers are paying the same, if not less, than residential customers.

“The Parliamentary Inquiry into banking sector funding costs and margins would have been extremely useful, as Federated Farmers wants a focused examination of these issues.

“If bank funding costs and margins were in its terms of reference, it would have helped put to bed once and for all, an issue that will otherwise continue to fester,” Mr York concluded.