Long-term wholesale interest rates have been dropping, which reinforces what we’ve been saying for a while: The market overcooked its forecast on interest rates. Rates will increase, but not as quickly as the market initially priced in. The five-year funding rate has dropped half a percent to 5.30% since it peaked in October.
Interestingly enough the banks have not passed this drop in funding rates on to mortgage customers. There isn’t a lot of competitive pressure for long-term fixed mortgage rates so why compete?
Check out the five-year wholesale rates below. You can view these rates here. At a current mortgage rate of 8.7% for five years fixed that puts the gross margin that banks earn at a staggering 3.40%. Too much? An interesting benchmark is the Australian five-year fixed rate at 8.04% and that’s with Australia having already lifted rates.
Long-term mortgage rates are way overpriced so we still recommend making the most of short-term rates, but set your repayments based on what you’d pay if mortgage rates were 8%. That way you pay off your mortgage more quickly and pay less interest.
It is so easy to get spooked into fixing into longer-term rates, especially with so much knee-jerk commentary out there. As Kiwis we need to drop our fixation with fixed rates. Actually, we need to stop our fixation with interest rates full stop and stop listening to Bob down the road whose cousin works for a bank and says that rates will be really high in a year’s time.
I feel the next six to 12 months could be interesting. A large number of Kiwis have opted for short-term rates, but the sense I get is that they are sitting there waiting to lock into a fixed rate. So as rates go up, Bob will send his friends into a bit of a tizz and mad panic will set in.
