Why can’t I have a 30-year mortgage?

With interest rates rising so fast, a lot of people are asking why Kiwis can’t take out a 30-year fixed-rate home loan like you can in the United States.

That’s an understandable question given how low rates were until quite recently. And with rates where they are now, I imagine most of us would now like a home loan rate with a ‘2’ in front of it locked away for 30 years.

However, that’s more complicated than it sounds. The fundamental reason is the US is different – to New Zealand, Australia and almost all other major economies.

Almost none offer the multi-decade, fixed rate loans the US does.

So why? Let’s assume a very simple scenario to help illustrate how it all works.

A bank borrows $100 from a depositor’s savings account (deposit accounts are actually loans to banks). That deposit has a floating interest rate. The bank then lends it to a customer at a 1-year fixed rate.

That means if interest rates go up, the bank pays the depositor more - but still receives the same amount from the borrower.

If interest rates go up sharply, the bank might end up paying the depositor more than it receives from the borrower, thus making a loss. If that loan has a fixed rate of longer than 1 year that loss becomes even bigger.

This ‘mismatch’ is a risk. To prevent large scale losses, like what we saw in the US recently, banks generally manage this interest rate risk by ‘hedging’ it as much as possible.

This means we take all our interest rate risk, match it off where possible (for example, 1-year fixed mortgages could be matched with 1-year term deposits) and hedge the risk that is leftover, the mismatch, in wholesale markets.

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"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... 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."

Antonia Watson, CEO, ANZ Bank New Zealand Ltd.

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.