Mortgage rate cuts worth $10b

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MO MONEY: If the Government wants to move from jaw-jaw to war-war, there is one obvious route to take: use its stake in Kiwibank to ramp up competition.

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MO' MONEY: Kiwi families will have a collective $10 billion more in their back pockets over the next three years as a result of plummeting mortgage costs.

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Kiwi families will have a collective $10 billion more in their back pockets over the next three years as a result of plummeting mortgage costs, injecting even more spare cash into the economy than next month's tax cuts.

The April 1 tax cuts, plus last year's cuts, will return around $9b to salary and wage earners.

The $10b mortgage estimate comes from Westpac. The bank analysed the country's entire mortgage debt and found that $98.47b in fixed-rate home loans - with an average interest rate of 8.51% - will mature by the end of 2010. If those loans are refixed at an average of 6%, the homeowners will face much lower mortgage repayments. Add in the effect of falling floating-rate loans and there will be an estimated $3.5b a year for three years freed up.

The figure could be even higher if interest rates continue to fall meaning families would save even more.

Some experts are tipping Reserve Bank governor Alan Bollard will drop the official cash rate by 75-100 basis points in his March 12 announcement, taking the OCR to 2.5-2.75% and putting further pressure on banks to drop mortgage rates.

"This is an enormous cash injection into the household sector. It is staggeringly significant, even compared to the government's tax cuts," said Westpac's head of product management David Cunningham.

For a household with a 20-year mortgage of $250,000, currently paying $1005 a fortnight, a reduction in rate from 8.51% to 6% would mean being able to cut repayments to $830 a fortnight.

Just how households will choose to spend the savings is a point of debate among economists.

Economist Gareth Morgan reckons many would be best to squirrel money away against the rising unemployment threat, but he's not convinced that will happen.

"The track record in this stuff is not flash. I'm not expecting too much in the way of perception on the part of households. I suspect they will wait until they see the pink slip," Morgan said.

Kapiti Coast financial adviser Liz Koh recommends maintaining mortgage payments at the original level, which would see the loan cleared nearly six years earlier, and around $120,000 less paid in interest.

Koh said: "People tend to spend what they have in their pocket, and there never seems to be enough. They manage their money passively rather than actively. The best thing people could do would be to pay off their loan quicker."

But Auckland financial planner Deborah Carlyon says for many families high petrol, interest rates and food prices have meant money has been so tight they had been deferring spending on things like replacement cars, clothes, house repairs and whiteware. So any extra money in their pockets is likely to flow into the economy quickly.

Johannah Branson, senior economist of the New Zealand Institute of Economic Research, said the group's consumer spending forecasts would be released this week, and that they would show spending rising, not falling, over the next few years, though the forecast was for spending to rise less than household incomes indicating a rising savings rate.

Lower mortgage payments were an element of that, she said, but also important were lower petrol and food prices, as well as rising wages and a return to positive migration, driven mainly by British people fleeing the UK's unemployment misery.

Branson said it appeared the dip in consumer spending levels of last November and December, when uncertainty was at its height, was now past. "People are starting to understand we are not quite in the same situation as America. We have nowhere near as bad a situation as they have."

ON APRIL 1
The tax cuts will give a worker on the average wage $18 extra a week
Earning under $40,000 = $0 a week
On $42,000 = $4.62
On $44,000 = $9.23
On $46,000 = $13.85
Between $48,000-$70,000 = $18.46
On $80,000 = $20.38
On $100,000 = $24.23
Independent earners rebate: all workers who earn $24,000 a year or more who are not receiving a benefit, Working for Families payments or New Zealand Superannuation qualify for a tax rebate. From April 1 the rebate will be $10 a week. It reduces as income increases above $44,000, meaning a person earning $48,000 a year would no longer be eligible for the rebate.

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