Banks pocketing more money on mortgages than 20 years ago and it's not from house price increases - expert

As if it's not already hard enough to buy a home, an expert is warning banks are making more money from mortgages than a few decades ago and it's not because of house prices. 

Nikko Asset Management managing director George Carter said banks have increased the percentage of profit they take from home loans and the floating mortgage rate is the main culprit. 

The Official Cash Rate (OCR) is set by the Reserve Bank of New Zealand. It's essentially the wholesale rate for borrowing "money", although there are other costs too. 

On top of the OCR, banks add a little bit extra to make a profit. 

Carter told The Project that a few decades ago banks were adding about 2 percent in profit but now it's closer to 4 percent. And that's costing Kiwis hundreds of thousands of dollars. 

"If you look at the data over the last 20 years or so, if you go back to 2000, the mortgage rates were typically about 2 percent above the Official Cash Rate.

"And over time, the OCR has been dropping but the variable rate hasn't been dropping quite so much. So now we're in a position where that gap has widened to about 4 percent," Carter said on Monday. 

He said the gap was particularly noticeable for the floating mortgage rates. 

"You'll probably see it most keenly in the variable rate mortgage. You know, on the fixed rates, they're priced off of what's called the swap spreads. 

"The swap spreads at the moment, on the two year they are probably around 4 percent, just over 4 percent. 

"So the banks are probably making about 2 percent on those, whereas we're seeing on the variable rate it's close to 4. So you definitely see it more on the variable rate mortgage."

Carter said lots of Kiwis won't have noticed the increase because the OCR has been steadily dropping until recently. 

"You probably don't notice too much if your interest rates are dropping. 

"On the variable rate, you're paying. You feel a little bit wealthier. 

"The fact that the margins are expanding, you don't really notice so much but now that it's turning in, interest rates are going up. That's when you really feel a pinch in the pocket."

Carter said while 4 percent might not sound like much, it can be the difference between paying off your home loan in 20 years v 30 years. 

"We're thinking of, you know, a young couple starting out, they're buying a house. They're going to be taking out a $1 million mortgage. And that difference of that 2 percent of the spread in the margin changing, that's going to make over $600,000 of difference in interest payments over the life of the mortgage." 

He urged Kiwis to negotiate with their banks to make sure they were getting the best deal. 

"I suppose like all things in your finances, know what you're spending your money on," he said.

"Negotiate where you can. The banks will negotiate on their variable-rate mortgages. So have that conversation with them. Watch out for the pennies. 

"But also keep an eye on those big-ticket items too because it will add up over time." 

It's not the only thing costing Kiwis more at the moment. New Zealand is in the grips of a cost of living crisis with high inflation pushing up the prices of goods and services. 

In response to rising inflation, the Reserve Bank is hiking interest rates which are putting even more pressure on already stretched budgets.