On 4th September ASB lowered its Floating Housing Mortgage rate to 5.75% which is a new low for a New Zealand bank. Why? And what does it mean? For most people, it will not have gone unnoticed that at the same time they increased their fixed mortgage rates by 0.20%-0.30% to have the highest fixed rates in the market.
Lowering their floating rate will cost ASB about $20m in reduced income. I can only think that there is now some acceptance that New Zealand is moving towards a period that will be dominated by short term rates and in particular floating rates. They will also be expecting to claw this back through higher fixed rates – especially the 1 year rate at 5.70%.
Are Rates going Up?
Below are two graphs. The first shows the 90 Day Bank Bill, which is used to fund floating rate mortgages. The second shows the 2 year swap rate, which is used to fund 2 year fixed rate mortgages. What you can see is (1) short-term rates have not moved at all and (2) the 2 year swap rate has increased over time but it hasn’t moved much in the past month.
Implied Rates
I have calculated future implied rates based on ASB’s current mortgage rates and then compared that with CBA rates in Australia (who own ASB.) For those new to my implied curve – an implied curve reflects the trajectory the 1 year mortgage rate would have to take to be indifferent between rolling 1 year at a time and fixing for say 3 years now.
The implied rates tell us that NZ is pricing in higher mortgage rates and faster increases than Australia. Why would NZ mortgage rates have to increase further and faster than Australia? From my perspective there is no good reason for this and this is further evidence that our longer-term mortgage rates are overpriced.
The disconnect is large mortgage margins
Although the Cash Rate (OCR) is at historic lows, mortgage rates are not any lower than they were in the last recession. The difference this time around is that bank gross margins have increased from around 0.8% two years ago to around 2.70% today.
Before we accuse the banks of being greedy – in part this is because of a disconnect between the Cash Rate and Where deposits are actually being priced. (For example you can invest your money in a 6 month deposit at 4.00% even with the OCR at 2.50%.) This “disconnect” will fix itself when short term rates eventually start to increase. And when this happens, competition between the banks will force mortgage margins back down to at least 1.50%-1.70%.
What that means is a 3% lift in the OCR from 2.50% to 5.50% will likely see mortgage rates increase by only 2% from from 5.50% to 7.50%.
1 Year versus 3 Year Mortgage Rates
As I have mentioned in previous posts, increasing mortgage rates are unavoidable. The real question is what option will deliver the lowest interest cost over time. To demonstrate what I mean take a current 1 Year rate of 5.50%. It will reprice in 12 months and then in 24 months. In 12 months the OCR is unlikely to have increased much so we could expect the 1 Year Rate to not be much higher than its current rate of 5.50%. Lets say 6.50%. Then 1 year later (our 24 month mark) lets say it has increased to 7.50%. The average rate over the 3 years is 6.50% compared to paying 7.60% if you take the 3 Year rate today. Paying 1% extra over 3 years on a $400,000 mortgage equates to paying $12,000 extra in interest.
Download our Rate Forecaster and see what the impact is on your mortgage for different interest rate forecasts.
[Download not found]Who Are We?
About Us
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 bucket load of money, time and stress. Sign up for our free newsletter and get emailed our latest mortgage advice and insights on the housing market.
