Mortgage interest rates

Press, 5 October 1984, Page 16

Mortgage interest rates

The Trusteebank Canterbury did not require Government approval to increase mortgage interest rates, the General Manager of the bank, Mr Frank Dickson said, replying to a correspondent, A. Suckling. “When the Government decided on a market forces economy, all regulations were removed,” Mr Dickson said. “It is now the responsibility of financial organisations to run their businesses in a prudent manner free of control.”

In his letter to “The Press,” Mr Suckling said: “ For many years the people of Christchurch and beyond have been told that the customers own banks. They do not, nor do they have any say in its operating decisions other than, say, Mr Dickon or any board member who may be a customer. It was the board’s decision alone, with the Government’s approval, to increase the recent home mortgage interest rates. The increased rates will be a great burden to many people: but who worries, for with the increased interest collected the bank’s management will be able to pay for the building constructed on the corner of High and Cashel Streets.” The suggestion that the increased interest would pay for the bank’s new building did- not take account of the need for adequate reserves, the use to which those reserves were put and the total operation of the business, Mr Dickson said. Successive Governments and their advisers in the Reserve Bank and Treasury have indicated to the trustee banks that there is a minimum level of reserves which they should all attain as soon as

possible,” Mr Dickson said. “Conventionally, the minimum performance ‘benchmark’ for a financial organisation suggests a profit before tax each year of between 3 per cent and 5 per cent of the funds employed. A reasonable part of this should go to reserves. The Reserve Bank considers a profit of anything less than 1 per cent in the special case of the trustee banks is insufficient to achieve the appropriate level of reserves. “In spite of statistics which prove that Trusteebank Canterbury is one of the most efficient of the financial organisations in New Zealand, last year we barely achieved the 1 per cent level, and forecasts for this year are no better. The margin on which the bank operates, as measured between the cost of money being the average interest rate paid to depositors and the income earned from various sources, is amongst the lowest of any financial institution. “The reserves created from retention of profit do two things. They provide a stability for the business and they provide the capital for the land, buildings, equipment and physical resources gener- ' ally, necessary to enable it to operate at an appropriate level.

"Trustees, management and staff are deeply concerned about the impact of higher mortgage interest rates on borrowers. Equally, the board and management are concerned about the interest rate offered to depositors to attract funds in the first instance. The necessity for adequate accommodation for the public, whether saving or borrowing, and the staff necessary to attend to the business

generated, is also a prime concern. Before the building of the new head office staff were spread over five different locations. This was both inefficient and expen-, sive.”

M. T. 0. Quaife wrote: “As a financial adviser to a number, of Trusteebank Canterbury mortgagors, I am dismayed by the apparent thoughtlessness and lack of social responsibility shown by the bank through its recent increase in mortgage interest rates. All too often I find clients who in the past have had $2O-odd a week available for saving or discretionary spending after meeting their living costs, now faced with an extremely tight budget, due to their increased Trusteebank Canterbury mortgage repayments. “Surely an institution of the size and nature of Trustee-bank Canterbury could have resisted any need to increase its lending rates, at least for the duration of the wageprice freeze. Failing that, could it not offer its mortgagors extended mortgage terms to offset any interest rate increase?”

“The strictly-controlled and arti-ficially-low interest rates of the previous administration have been replaced by the new Government’s market forces economy," Mr Dickson said. Interest rates on deposit have risen dramatically. The bank has no choice but to match deposit and lending rates. “Extended mortgage terms were offered in the letters to all borrowers.”

If the correspondents or any readers wished to pursue this complex issue in greater depth, Mr Dickson said he would be glad to discuss it with them if they telephoned him for an appointment.