The most frequent question we get is how can Indi have such a low floating rate? There are two parts to this. First, how can Indi have a floating rate so much lower than the big bank floating rates? Second, how can Indi have a floating rate that is competitive with, and even cheaper than, big bank fixed rates?

Big bank floating rates have a huge premium built in

Big bank floating rates are usually at least 1.50% higher than their fixed rates. Kiwis have grown up with this and think that there’s a good reason for it, that floating rates must be more expensive to the bank and they have to pass that cost on.

That’s completely wrong. There’s actually no good reason why big bank floating rates are so much higher than their fixed rates. In Australia, floating rates are about the same as fixed rates, and the vast majority of customers there have a 100% floating rate mortgage.

So, why are NZ big bank floating rates so high? We said there was no good reason, but there are a few bad reasons.

  • It makes things more complicated, and big banks like things complicated. To get payment flexibility you have to carefully balance your portions and rebalance regularly to avoid paying too much. This is confusing and a barrier to easily switching between banks, which they like because it means they don't have to work so hard to retain customers.
  • Big banks prefer customers to be on fixed rates because that locks them in. You can only switch away at certain narrow time windows when your fixed term expires. It's even better for banks if you have a range of fixed terms that overlap, so there’s never a good point where all your lending can be switched away. Big banks want customers to be on fixed rates, so they make floating rates unreasonably high.
  • Banks are a bit stuck with high floating rates. With fixed rates, they can adjust them and it only affects their margin gradually as borrowers’ fixed terms roll over. With floating rates, if they drop them significantly that flows through to reduced margin overnight. It would be a huge hit to their profit. To drop floating rates significantly, they’d have to increase fixed rates significantly to balance it. However, any single bank doing that would instantly be uncompetitive with the other banks, so they can’t. Either take a huge hit to profit, or become uncompetitive… none of those is a good option, so they’re stuck.

The big banks haven’t necessarily sat down together and deliberately decided to set floating rates so high based on these bad reasons, it is just how things have evolved, and they see no reason to change.

Indi sees things differently. We don’t charge a premium for floating rates. We like things simple, because if we’re simpler than the banks then kiwis can choose us without needing advice or getting confused. We don’t want to force customer's to stay with us, we want them to choose to stay with us because we give them the best and cheapest mortgage. And we’re not stuck based on past decisions, because we’re just starting out and we’re able to reinvent things the way they should be.

Indi can offer low floating rates because we have a different business model to the big banks

The way pricing works, for all lenders, is that the money we lend out has a cost, called the "cost of funds". The difference between the rate we charge customers and the cost of funds is our income. Income goes towards paying our expenses, and what is left over is our profit. A pretty simple equation. All lenders set their customer rates to be high enough to cover their costs and leave a reasonable profit.

Now, big banks have an advantage compared to Indi when it comes to cost of funds. A big component of the money that banks lend out is what we call “cheap deposits”. That is, the bank accounts of everyday kiwis. By offering the service of operating bank accounts, banks feel entitled to use the money for lending without paying their customers a high interest rate on it. Indi doesn’t have access to cheap deposits, we get our funding from institutional funders that definitely do want a reasonable interest rate for it, so we have a higher cost of funds than big banks.

However, the tables are turned for the other parts of the equation.

First, Indi has much lower operational costs than the big banks, which are notoriously inefficient. They have thousands of staff in hundreds of branches and offices, doing things manually, taking weeks. Indi is designed from the ground up to be efficient, to use digital automation to improve the customer experience and keep costs low.

Second, Indi requires a much lower profit than the big banks. Mostly because we’re not greedy. NZ big banks are among the most profitable in the world, and all these profits get siphoned off to their Australian owners. Indi wants to be successful by offering the best mortgage product to thousands of kiwis, not by wringing excess profit from each one.

So, although Indi isn’t a bank and we don’t have the low cost of funds that comes from cheap deposits, we have lower profit requirements and lower costs. All together these let us offer mortgage rates that are even cheaper than what the big banks can offer.


Disclaimer: Indi reserves the right to change floating rates at any time and does not guarantee savings in comparison to any other rates. Market conditions can change unexpectedly, which may result in different outcomes than expected. Nothing in this article is financial advice. Indi does not provide financial advice, and recommends you consult an advisor if you have questions or concerns.