There is no logic for why long-term fixed rates increased as much as they did this past week (as I covered in an earlier blog). It was driven by consumer panic with up to $10 billion of home loans trying to switch into fixed rates at the same time.
In Australia 70% of the housing market is on floating rates. Aussies are not attracted to fixed rates in quite the same way we are so haven’t rushed in. Interestingly, Australia has a higher official cash rate (OCR) but lower mortgage rates! At the short end the difference between both countries is 0.50% whereas at five years it is 1.30%. New Zealand long-term rates are clearly out of whack with Australia.
There has been talk about high bank funding costs being passed on. Guess what – that’s already happening! Bank margins have increased by over 150% in the past year. That is enough to cover increased funding costs and still take extra profits.
The way to figure out if a fixed-rate term is “good value” is to look at the implied future rates. The implied graph below shows the implied future one-year rate in X years’ time. Based on current rates the one-year rate needs to be back at 9.00% within three years for the current long-term rates to be considered good value. This won’t happen and that’s why I think short-term rates offer better value (for now.)
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Squirrel is an independent mortgage broking and advisory business. We are happy to help you get the best out of your mortgages whether that is buying property, refinancing or simply restructuring everything to make it work better. If you are buying a new home then you can apply online with us and we’ll save you a bucketload of money, time and stress. Sign up for our free newsletter and get emailed our latest mortgage advice and insights on the housing market.JB (author of this blog) is the former general manager (products) at ANZ National Bank and has managed over $15 billion of mortgages.
