Concern at cost of agri loans

average rates on business loans have risen sharply to above 7%, whereas average home loan rates have yet to hit 5%.

THE growing gap between interest rates charged by banks for agricultural and business loans compared with housing loans is a worrying trend for farmers and orchardists.

NZAB director Andrew Laming said the historical gap is widening and that banks seem to be using higher margins on business loans to subsidise the housing sector.

“It appears that banks are happy to lean on the business sectors to keep home lending on life support,” he said.

The agribusiness adviser and former rural banker used the latest Reserve Bank of New Zealand (RBNZ) data to compare the interest income earned by banks on residential mortgages versus on business loans, of which agri loans are a $62.5 billion slice.

Laming said agri mortgage broker NZAB operates across all major banks and keeps a close eye on bank funding costs and their underlying drivers.

Banks point out that business and agri loans require more of a bank’s own capital, as determined by the RBNZ, and there are different security rules and risk management factors.

Since bottoming out at plusminus 3% nearly two years ago,

For borrowers who are coming off fixed terms, the re-fixing options for business loans are 8-9% compared with 6-7% for home loans.

The gap is wider than in the past, especially during the long period when all interest rates generally were much lower, Laming said.

Other means of comparison are the relative margins between housing and business loan rates and the costs of borrowing for banks, using RBNZ data on the average interest rates on bank deposits.

The margin for banks on home lending is below 1%, while for business lending it is 2.75%.

“It is hard not to conclude that banks are elevating the margins for their business and agri customers to keep afloat the housing loan market, an easier place for them to lend and earn profit.

“Keeping home loans lower than what they otherwise would be encourages relatively more activity in this sector.”

The first response from the big trading banks is to point out the cyclical variability in floating versus fixed interest rates and agri versus housing loans.

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