Housing: Interest rate war predicted as banks look to lend more to potential homebuyers

A mortgage rate war could be on the way as banks look to lend more money to potential homebuyers.

Heartland Bank has stoked the fire with a record low, one-year fixed loan rate of 1.99 percent.

Meanwhile, house prices continue to defy COVID-19, with figures from the Real Estate Institute showing the median house price is now $685,000.

Homes are also being bought at a faster rate, meaning the number of new listings is staying low.

Heartland Bank's announcement that it will offer a 1.99 percent mortgage rate is likely to be followed by others, according to Massey Business School associate professor Claire Matthews.

She said a mortgage rate war was very much on the cards.

"I think there's every likelihood that there's going to be a bit of an interest rate war," Matthews said.

"This tends to be the time of year when the lenders have interest rate wars. We haven't had them seriously in the last couple of years."

Spring was often a time when people bought houses, which caused some excitement at banks, Matthews said.

Banks might look to compete, but it would depend on how much funding Heartland Bank had, she said.

If it had a modest sized pool of funds, she said other banks may not look to compete.

"If Heartland's got a more substantial amount of money, then they may feel that they need to make more of an effort to counter that, because there'll be a greater amount of lending that they could potentially lose."

The low mortgage rates were coming at a time of a buoyant housing market, which has been defying the impacts of COVID-19.

Figures from the REINZ show the median house price across the country is now at $685,000, which is up from just under $596,956 a year ago.

In Auckland, the median price has soared 12.6 percent to $955,000.

In Canterbury, the median price increased by 11.1 percent to $500,000, and in Wellington, it increased by 13.1 percent to $735,000.

Gisborne jumped the highest by 45.8 percent to $560,000.

Kiwibank senior economist Jeremy Couchman said prices were rising partly due to the low mortgage rates and the Reserve Bank cutting the Official Cash Rate (OCR), which is currently at 0.25 percent.

"They also removed loan-to-value ratio restrictions on new lending, meaning that certain types of borrowers, such as investors and new homebuyers, can get access to credit much more easily and there's just a significant lack of listed properties at the moment."

There were indications that mortgage rates would continue to fall, with expected drops in the OCR next year, Couchman said.

The Reserve Bank had been worried about inflation and employment in its medium term outlook, he said.

"That suggests that if this continues, this outlook remains quite subdued, that they [the Reserve Bank] will probably move to ensure that they do meet the mandate. So, you know, we could see further cuts to the cash rate early next year, that's certainly our expectation."

That should help push mortgage rates down further, Couchman said.

REINZ chief executive Bindi Norwell believed a fear of missing out was contributing to the high demand.

"People expected it to go down in terms of price and probably held off for some time to wait for that. But it hasn't happened, so now people are thinking - wow, I need to get into the market if it continues to increase."

Norwell said the market had also been bucking the trend of normal election cycles, when it tended to quieten as prospective buyers waited to see the outcome of the vote.

She did not expect to see a slowdown in the market anytime soon as summer approaches, which is traditionally a busy time for buying and selling property.