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Mortgage Rates Newsletter
September 24th, 2009
Mortgage rate news is a little like the weather at the moment. After experiencing spring sunshine under a big high pressure system, we then get buffeted by a low.
A week ago we rejoiced about short-term interest rates, particularly floating rates hitting levels we hadn’t seen before. Floating rates from the big banks are down as low as 5.69% after being in double-digits not that long ago.
This week the story is quite different. Long-term term interest rates have risen again and they look like going higher yet.
We’ve picked on Westpac to illustrate what’s happening as it is the main bank that hiked rates this week. However TSB Bank has also increased its three and five year rates to 8.20% and 8.50% respectively.
In this graph we have compared Westpac’s rates at the start of the year with its rates today and a week ago.
The picture is stark. Nine months ago the yield curve was flat and what economists would call slightly inverted – that is short-term rates were higher than longer term ones.
Today the curve is steep and positive with long term rates significantly higher than short term ones.
There are two messages in this story. The first is that it is pretty clear the only place to be is short term rates. Sure they will increase (probably around June next year), but there is a heck of a lot of increasing to go to flatten out the curve.
Secondly the forecast is that longer dated rates will continue increasing. We expect that other banks will follow what Westpac has done. ASB’s rates are already higher than Westpac’s rates. The former’s five-year rate is 8.60% compared to 8.49% for the Big Red.
Also history shows us that when one bank increases its rates others aren’t shy at following.
Backing up this view that longer term rates are on the rise is comments from economists. Many noted in their economic reports this week that there are signs international markets are slowly recovering. As that happens interest rate rises are inevitable.
September 18th, 2009
In the past banks competed for your home loan business primarily over the two-year term, occasionally there were skirmishes elsewhere, but now it looks like the battleground is in floating rates.
In the past couple of weeks we have seen a number of lenders chop their variable rates to levels which are now at historical lows.
Home owners and property investors will be pleased, as it is bringing down their interest costs. People rolling off fixed rates onto floating are seeing their interest rates fall from around the 7.50% mark to 6% or less.
No doubt the Reserve Bank is happy too, as there has been a huge amount of criticism that banks hadn’t lowered their floating rates, even though the official cash rate had come down.
It seems pretty clear that the banks were increasing their margins on this business to levels which looked high when compared to recent historical data.
The cuts we have seen in the past fortnight back up this claim about fat margins and may well be seen as an admission from lenders that they were doing very well in this part of their lending book.
The current battle is different from previous ones and fascinating in terms of where lenders are positioning themselves.
First up, not all the banks have included themselves in this fight. In the past week it has been ASB, BNZ and Westpac who have joined in. Our biggest bank, ANZ National, has stayed out of it so far and made no meaningful changes; likewise the normal aggressor, Kiwibank, is sitting quietly at the moment.
With the competition, lenders have changed their position in the market since the start of this year. This table shows that in January BNZ’s standard floating rate was one of the least competitive, now it is one of the better on offer.
Likewise, ASB has changed its position on the league table too.
But to confuse the picture Westpac and BNZ have made their best offers in highly targeted products. Westpac has chosen its Everyday Choices revolving credit loan product as the one which it offers the best rate in.
This move is a little gutsy as many people don’t like or necessarily understand revolving credit (sometimes called line of credit) loans. One of the reasons is that they feel the balance owing can creep up quickly, increasing personal debt levels.
Meanwhile, BNZ has chosen its offset product, TotalMoney, as its lowest priced variable rate loan. Again, offset accounts are not widely used or understood in New Zealand.
September 10th, 2009
I can almost hear all those people sitting on floating or short-term mortgage rates breathing a sigh of relief after today’s official cash rate (OCR) announcement.
The governor of the Reserve Bank, Alan Bollard, decided to leave the OCR unchanged at 2.50% and more importantly he reiterated his line – the line the markets don’t believe – that OCR increases are not likely until the end of next year.
Yes that is sweet comfort in the short term, but the medium to long term looks increasingly unpleasant.
Two comments Bollard made today are well worth noting. One is that he has removed the possibility of further rate cuts. As readers will recall, in his previous statement he made the enticing comment rates could yet be cut further.
If you had that in your planning take it out now – it isn’t going to happen.
The second comment he made is don’t assume these interest rates will stay at these levels forever.
When they rise they will rise quickly and steeply. This is shown in some of the graphs accompanying today’s monetary policy statement.
Also, one of the economists had this to say: “Once the bank is convinced the time is ripe, sizeable interest rate movements can be expected.”
The view developing is that once the central bank starts tightening, it will endeavour to get the cash rate back up to “neutral” as soon as possible.
Accordingly, the Bank’s 90-day bank bill rate track goes from 2.90% in December 2010 to 5% by March 2012.
While this increase may seem scary, when it happens neutral is somewhere around historical averages, not up around 9% or 10%.
What does this mean for borrowers? The key point is that you will need to consider your strategy over the medium to long term and decide who you will manage your interest rates and cost.
Right now this is an opportune time to be using some of the savings from reduced interest payments to reduce your principal. But I suspect not many people are actually doing that.
One thing you must be aware of is being enticed into sweetheart floating rates. Over the years (although not recently) we have seen lenders offering sweetheart “introductory” deals for shorter duration terms.
There is talk that these sorts of lending products will come back into the market.
Like all good things these terms don’t last forever and at some stage you will probably have to roll onto what I call more standard rates.
One thing I think will happen is that there will be a bit of a campaign amongst banks to get your business as we move into spring more fully. However, it won’t be any of these deals where you can win a house or overseas travel or the like.
It will be around rate and shorter-term rates will come down. In the past week ASB has put out an historically low floating rate of 5.75% and this morning TSB Bank dropped its six-month fixed home loan rate from 5.50% to 5.35%. That makes it the lowest rate for this term, just pipping HSBC and Westpac which both sit at 5.39%. The median big bank six month rate is 5.48%.
There will be a battle for business, but not all lenders are likely to play the game. More importantly the battle will shift away from medium fixed term rates (two years being the recent competitive zone) to floating and short-term rates.
Bollard will like that, as it will make the OCR a more effective tool in managing interest rates, compared to the time when the majority of home loans were fixed at two years and outside the direct influence of the OCR.
September 3rd, 2009
Who do you believe about interest rates? The Reserve Bank or the financial markets?
The Reserve Bank governor Alan Bollard continues to reiterate his view that the official cash rate will stay at current levels until the end of next year, however the financial markets are pricing in increases for earlier in the year.
This stand-off is a situation I have commented on earlier. When the markets get to a turning point, like they are now, there is a tendency to predict that things will move in the opposite direction. Staying put never seems popular.
Bollard’s comment, which I agree with, is this: “The financial markets either want things to go down or they want things to go up, they just don’t seem to do stability very well, but they’re not necessarily right.”
He went onto say: “The market’s always got its own view and often it’s wrong.”
“We’ll come out with our views next week and as usual we will be absolutely clear cut about (our view on rates).”
Trying to understand what drives rates is pretty hard for mere mortals too. This has been shown at the unofficial Parliamentary enquiry into interest rates which is going on this week.
It seems not many submitters are sticking to the subject and a number of commentators are using it as a soap box for their economic views.
A graph we produced seems to suggest there is a prima facie case that banks are increasing their margins on floating rates. But are they ripping us off?
The question was put to Sam Knowles, the head of Kiwibank and no doubt the nemesis of the Australian banks. He was asked at the enquiry if the banks were “rorting” the system.
Surprisingly, he said no.
The whole enquiry has become a damp squib, made wetter because the four big banks turned down their invitations to attend, likewise the Reserve Bank is absent.
However, there is some information out this week which is useful to borrowers. It is the ASB’s Home Loan report.
The report discusses the pros and cons of various terms. A key point to remember is that when deciding what term to select for your home loan, you should be thinking about the cost of the loan over the long-term.
If, like most people at the moment, you are using short-term rates and rolling over, you can either choose to fix for longer terms, thus tying in a rate which is on the low side historically, or you can continue to use shorter-term rates and hope that the average cost over the long term is better than what you could lock in for say three years or more now.
The report gives a good example of five-year rates. Currently five-year fixed rates are 8.30%, while one-year rates sit around 5.50%. Clearly today the deal is a no-brainer. But one-year rates will increase and be higher when you come to refix next year. But will they increase by big enough margins to make the short-term option look unattractive?
The bank has done forecasts for the next 60 months and suggests even with the increases likely to come through on one-year rates, they still look like they will deliver a lower average cost over the five-year period.
August 19th, 2009
The Bank of New Zealand hasn’t done anything normal in the home loan market for many years; and it doesn’t seem to have changed its ways recently.
The bank created headlines a number of years ago with its “Unbeatable” campaign. During this campaign it was the market leader pushing fixed rates, particularly in the two year space, down.
Part of the driver for the campaign was its decision not to distribute its home loans through mortgage brokers, even though brokers grew to control 40% of the market.
The logic for this move was from what you could call a domestic between the bank and brokers where it wouldn’t allow them to sell its popular Global Plus loan product which offered borrowers Air New Zealand Airpoints dollars.
Since then the bank has relied on its own mobile managers and branch staff. It claimed that these channels of distribution were more cost effective than brokers.
Well how things change. Last week all the chatter during the tea breaks at this year’s NZ Mortgage Brokers Conference in Wellington was about BNZ sacking all its mobile managers.
The bank has confirmed this to Mortgagerates.co.nz, but the reasoning is not so clear.
One of the theories is that the bank may replace its mobile managers with brokers. A second is that the bank’s parent, National Bank of Australia, has just bought the Challenger mortgage business. Challenger owns a group called PLAN which operates in New Zealand.
Maybe the bank will use all the PLAN brokers instead? However, PLAN says that isn’t part of the plan.
The question is what does BNZ intend doing in this space? For years it has aggressively chased market share, and its mobile managers are a key part of that programme.
The answer appears to be that BNZ is pulling back in the home loan market and will leave it to the other banks to fight for business.
It does seem an odd move. One thing that borrowers which seems likely is that the bank won’t be out there leading the market down with its rates. Or maybe it will be super-aggressive in cutting its rates to get customers into the branches?
August 13th, 2009
The trend and the message in the changes to home loan rates in the past week have been clear and a little worrisome for borrowers.
As reported rates for terms of 18 months or more have risen, and the rises for three and four-year money have been steep. In many cases more than 50 basis points.
Shorter dated money rates have generally stayed static, however market leader Kiwibank and one of the building societies have cut their floating rates in the past week. (BNZ also made a cut to one of its loan products, Total Money, however Total Money is part of a product which includes some other elements. For this reason I don’t include it as a “standard” rate).
To see how the interest rate curve has steepened check out this graph showing Kiwibank’s new rates versus its earlier ones.
The worry is that short-term rates, while attractively low, aren’t going to stay around these levels forever. At some point they will start rising and when you look at the height of medium and short-term rates these increases could be a significant whack.
Borrowers who currently have their home loans of maturities from floating out to one year, will need to be watching what’s happening closely and reviewing their strategy.
One option to consider is leaping in and fixing some of your loan for a longer term – unfortunately the time to do that has, arguably, passed. While the three-year fixed rate is just below its average for the past five years, longer durations are now above their five-year average.
We will be watching these longer-term rates with interest to see if they have gotten too high. They have increased, mainly, because there are growing signs of economic recovery in offshore markets – particularly the United States.
However, there is no guarantee this pick-up will be a long-term constant trend. Indeed, many economists expect there to be hiccups to the economic recovery along the way. When these come there is a chance funding costs for home loans will drop back.
If this happens they may only be temporary and will give you small windows of opportunity to fix.
However, I wouldn’t bank on it as a strategy.
August 6th, 2009
After many weeks of home loan rates remaining unchanged we have a movement. Today New Zealand’s newest bank, SBS, raised its six-month and one-year fixed rates by 10 basis points.
Now the increases aren’t big, nor do they put SBS out of the market in a competitive pricing sense. You can see here that with six-month and one-year rates of 5.60% and 5.70% respectively, they are some of the cheaper rates on offer.
However, they do break a drought. It’s not often we go for more than a month with no changes to home loan rates.
The significance of the change is that it is at the short end of the market, the terms that many home owners and property investors are currently using.
Now that someone has moved, attention shifts to whether other lenders will see this as an opportunity to follow suit and lift their rates too.
There is a strong possibility this will happen, but countering that argument is that SBS is a small player in the market and its influence may be less than if the changes were made by a big, High Street bank or Kiwibank – which often leads the market with changes.
No doubt the move will attract attention from fellow rate watchers who may well argue the hike in rates is unjustified as wholesale rates in these terms have traded within the current range for quite some time. Their argument will be that here we go again, banks ripping off the poor Kiwi borrower.
I have sourced a couple of graphs from ASB which show that the 90-day bill rate has remained pretty static over recent months and the official cash rate has flat-lined at 2.50%.
However, a look at various other swap rates shows that they have gradually been drifting upwards over time.
One of the more likely reasons that SBS has raised its rates is to do with the weighted average cost of its mortgage book. While short-term funding is pretty cheap at the moment, replacement funding banks are getting for their long-term money is far more expensive than before.
What is clear is that the home loan market is quite complicated at the moment and there are significant shifts taking place. This graph illustrates that although rates came down across the whole yield curve in the past year and became much cheaper than before, long-term rates are bucking the trend and heading upwards steeply.
This trend, plus a possible start of short-term rate increases presents a challenging situation for borrowers right now.
July 30th, 2009
One of the great things about watching interest rates is the poker game that goes on between the central bank and markets from time to time.
Today’s official cash rate announcement is one of those games.
Everyone agrees we are somewhere near the bottom of this part of the economic cycle, therefore the new question becomes when are things going to turn and when will rates start to rise again?
Following the previous OCR announcement we have seen tentative signs of a very modest recovery; this positive news sent all the economists rushing off to make new predictions about rate rises.
We have seen this through our Experts View section where all sorts of scenarios are developed and argued. Few, in fact only one, argued for further cuts.
It seems to be the role of the wholesale financial markets to anticipate Reserve Bank governor Alan Bollard’s next move.
Most had decided he was done cutting the OCR, so their next question was when is he going to start hiking?
Today’s statement illustrates how they have a built-in tendency to get ahead of themselves.
Bollard made it very clear today that he views the signs of recovery as patchy at best and any recovery was weak.
He then went onto say that there may be scope for further easing – so perhaps we are not quite at the end of this part of the cycle yet.
What does this mean for borrowers? Well, the basic message is that continuing to use a short-term fixed rate strategy will still work.
This paragraph in the statement is arguably the most crucial for borrowers:
“We consider it appropriate to continue to provide substantial monetary policy stimulus to the economy. The OCR could still move modestly lower over the coming quarters. We continue to expect to keep the OCR at or below the current level through until the latter part of 2010.”
There is always the caveat things may change, but at the moment the risk to the short-term fixing strategy is low.
Attention will now turn to the wholesale markets. We have seen swap rates creep up slightly as the market got ahead of itself in anticipating rate rises. However, they have come back five to10 basis points after the announcement.
I would expect these rates to ease back some more and it is conceivable home loan rates could fall marginally on today’s news…
If they don’t fall, one thing is for sure; the Reserve Bank has put a cap on any immediate home loan rate increases.
July 21st, 2009
Should there or shouldn’t there be an enquiry into bank interest rates and their margins?
It’s the hot new question and a great lightening rod for passionate debate.
The left-leaning parties in Parliament have announced they will hold an “unofficial” enquiry into banks and the rates they charge, however those on the right are suddenly totally opposed to the idea.
Normally one would come to a conclusion that this “unofficial” enquiry is just a political stunt. Certainly some commentators are taking that view.
While it may be a stunt, it’s worth noting the positioning of key stakeholders.
First up the government seemed vaguely interested in such an enquiry. Then it put the kybosh on it big time. Some reports say Finance Minister Bill English told his people on the Finance and Expenditure Select Committee any enquiry wasn’t going to happen and they were to opposed it – which is what they did.
However, some of the government’s key supporters such as Federated Farmers seem pretty keen on the idea.
Likewise, the big-Australian owned banks have sat on the fence. None have said they won’t take part. (No doubt they aren’t that keen on the idea, but that’s another story).
And it seems the Reserve Bank governor Alan Bollard is mildly receptive. In the central bank’s report on bank margins it suggests short-term rates were too high and it seemed to indicate it was happy with some sort of examination.
I always felt it was putting some pressure on the government. Apparently Bollard has been invited to this “unofficial” enquiry, but he needs English’s permission to take part.
Perhaps this is clever politics and forcing English to say no.
No doubt the public will support the idea of an enquiry too.
This all leads to the observation while an enquiry may not amount to much, the government is well and truly on the wrong side of the argument.
July 15th, 2009
One of the most common questions I get asked is where are interest rates going? People want to know where rates will be in a year’s time to help them make decisions on what to do now.
Unfortunately no one can answer that question. It’s a bit like saying asking what are you going to have for dinner on June 15, next year?
Rates can be highly unpredictable, especially in this period of time where there is much economic uncertainty.
A year ago no one expected interest rates to be as low as they are today; if they did then it would be hard to explain why all those people took out long-term loans.
If they knew where rates were going they wouldn’t have done that and we wouldn’t have had this huge amount of activity breaking fixed rates.
While we don’t know where rates are going we do a lot of work at mortgagerates.co.nz trying to get a handle on this question.
One of our regular surveys is of economists and their predictions about where interest rates will be in the future.
In the survey we ask the question about the OCR and the floating rate mainly as they are tied together, although Bank of New Zealand chief economist Tony Alexander argued otherwise recently.
The results of our most recent survey show a clear trend; but it also show that economists have some quite different views around timing.
The overall trend, and this shouldn’t come as a surprise, is that rates will stay low for until sometime in 2010, and then start to rise quite quickly.
Looking at the floating rate graph it shows that we may well see some more cuts to what is on offer.
The cuts are looking at coming in the next quarter or so which may tie in with any spring advertising campaigns from banks. From there we don’t see any movement until early to mid 2010. Then rates rise, and according to predictions, they may rise quickly and strongly.
Indeed there suggestions that floating rates could get up above the 8% mark within 12 months.
While that seems high, the floating rate has averaged a whopping 9.4% over the past five years – making 8% look nearly cheap!
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The OCR ain't going anywhere
The new Reserve Bank governor, Graeme Wheeler, predicts that the official cash rate won't by going anywhere until 2014.
This is clear from the 90-day bank bill forecast graph in the December Monetary Policy Statement. It shows clearly how over the past year forecast increases kept getting pushed down each quarter.
A year ago the bank was predicting the 90-day bill rate would be up at 4.00% by March 2014. That forecast was wound back to 3.3% in March, 3.2% three months later and is now down at 2.8%.
The good news for borrowers is that, asssuming things pan out as forecast, then home loan rates aren't likely to be going up any time soon either.
Disclaimer: Every possible effort has been made to keep the information in the rates tables as accurate as possible, however, neither the publishers of Mortgage Rates nor anyone engaged to compile these tables accept any liability for inaccuracies or any loss suffered as a result. It is strongly advised that readers check loan details directly with the provider concerned.
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