Fixed rate mortgage's need to be broken in national interest says PEC

The Productive Economy Council (PEC) has come out strongly in support of both Bill English’s and Phil Goff’s requests for banks to reduce fixed interest rate bank fees in the interest of the New Zealand economy.

“There are many issues at play here,” says Selwyn Pellett, the spokesperson for the PEC, “but it has to happen because the OCR reductions are not flowing through to the economy at large quickly enough, and by the time it does 15% of New Zealand could be unemployed. The simple solution is to share the pain of the “early termination fees” for fixed-term mortgage holders and get it done quickly”.

The PEC advocates an arrangement whereby the majority of the cost of breaking fixed terms mortgages would be worn by banks and lenders equally. Since the main benefit flows to the entire economy, Pellett suggests that the Government should also step up to the plate to make it happen.

“We recognise that banks are not charities”, says Pellett. “But they need to take some responsibility for how we got into this position and share some of the pain with the wider community. “ He points out that tax- payer’s money is already propping up the balance sheets of the Banks through the Government-backed deposit guarantee scheme and suggests it’s time that the banks offered some quid-pro-quo.

The PEC proposes an arrangement that would allow mortgage-holders to share the costs of breaking fixed term mortgages with their banks and the government each paying a third of the early termination fees.

“If banks work proactively to help their customers to achieve greater financial stability - by lowering the cost of retaining their houses and businesses - that will pay dividends for the banks in the form of fewer defaults and a healthier portfolio. In turn that reduces the need for banks to raise further capital, and the resulting customer loyalty is likely to pay long term dividends as well.”

“We also think the government should step in and standardise break fees and the formula so it’s made simpler for customers to understand - but that’s an issue for the future,” says Pellett.
Pellett points out that a number of borrowers may already have terminated fixed-term mortgages and paid high penalty fees for doing so. The PEC proposes that any arrangement reached between the government and banks should be backdated to early October last year, when the government first announced the deposit guarantee scheme. That would allow borrowers who have paid early termination fees since that date to claim back two-thirds of those fees.

Asked why the Government should get involved in this sort of arrangement, Pellett suggests it’s all about safeguarding the economy and softening the effects of the recession.

“The moment consumers see they can survive the recession they will start spending again. But that won’t happen until they feel confident they can take an income hit without losing their assets. Everyone is doing numbers right now to work out if they can survive on a reduced income. That’s prudent financial management. But people on fixed mortgages often can’t reduce their costs in any significant way so they just stop spending and we all tumble into a recession since 80% of mortgages are fixed.”

“I can’t imagine a stimulus package that could put more money into the economy and help as many people as this single initiative,”says Pellett. “These are extraordinary times. We need to act decisively and with a common sense of purpose and wherever possible share the pain required so we don’t lose entire parts of our economy.”

About the PEC

The Productive Economy Council represents a growing community of people focused returning New Zealand’s GDP per capita to the upper quartile of the OECD. It was founded by four of the former Trustees of the Hi Growth Project including current President of the Hi Tech Association and businessman Wayne Norrie, former executive of the Hi Growth Project, Garth Biggs, Former Chairman of the Hi Tech Association and businessman Selwyn Pellett and APEC Business Advisory Council, Co-chair Technology & Information Working Group and businessman, John Blackham.

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