Financial Risk Sharing in New Zealand′s Residential Mortgage Market

Suggests that a form of modified variable rate mortgage (VRM) should be the type of mortgage that is most attractive to the majority of owner‐occupiers in New Zealand. VRMs are shown to be lenders′ choice of mortgage because their traditional reliance on retail deposits and other forms of short‐term finance necessitates that their assets be of similar duration. In exchange for unilateral rate‐setting powers, lenders compensate borrowers (to a degree) with relatively low administration costs. Though it appears that the range of mortgage products available in New Zealand is now too narrow, this is beginning to be rectified by new products that offer more conservative borrowers the ability to reduce risk. Finally, analysis of historic mortgage margins indicates that there are differences between lenders. Solely on the basis of rate‐setting practice, though no lender appears to have been able to charge significantly higher margins than all of the other lenders, one institution has offered significantly lower margins.