Having the right Mortgage Strategy can save you thousands in interest every year let alone over the life of a mortgage. That’s why we think it always pays to get the best possible advice. JB (author of this blog) is the former General Manager Products at ANZ National Bank and has managed over $15 billion of mortgages.
RBNZ Drops Official Cash Rate to 2.5%
As we forecast (see previous blogs) the Reserve Bank dropped the OCR another 0.50% to 2.50%. As a result we can expect to see housing rates drop a bit further getting us closer to the elusive 5.00% mark. Offsetting this to a degree, banks are very reluctant to pass on the rate cuts. Hopefully competition prevails!
The Reserve Bank also reinforced our long held view that rates will stay down for an extended period and that there is no need to rush into long-term fixed rates. There has been a lot of misinformation out there the past few months and a number of homeowners were “scared” into fixing as rates shot up.
We are expecting long-term wholesale rates to ease somewhat so we should see the 2-5 year fixed housing rates come back a bit from their current levels. I’m still forecasting short term housing rates to get to 5.00%-5.25% and the 3 year fixed rate to get back to around 5.95% (but it might take a while.)
We might see the 5 year rate ease back to around 6.95%-7.20%. Long-term rates will rely on bank competition because lenders aren’t really competing on these fixed terms yet and probably won’t for a while.
Bank Margins and Lack of Competition
Long-term wholesale rates are hoovering around 4.50%-4.70%. That means banks have a gross margin of 3.0% locked in (against historic averages of around 1%. Even after allowing for higher funding costs these margins are about 0.50%-0.70% higher than they should be.)
The same is true with short-term rates. Wholesale rates are at 2.50%-2.75% and customer rates are still up around 5.50%.
One of the big issues holding the market up is retail deposit rates. I am of the view that Kiwi Bank is holding these up as it needs retail deposits to fund its housing growth.
Mortgage Strategy
The good news is that our preferred strategy has not changed since the last OCR. Luckily we don’t need to come up with excuses about this last rate cut being unpredicted or the RBNZ changing its tune. Neither of which are true.
Our preferred strategy is to use a combination of Floating and Short term fixed rates with a view to only lock in long-term rates from mid 2010 onwards. For me the trigger to fix long-term will be a sustained improvement in the economy and long-term rates legitimately increasing to around 7.50%-8.00%. By legitimately I mean not driven by consumer panic.
Our view on mortgage strategies has not really changed. For more insight also read our previous Mortgage Strategy Update and Don’t Panic About Rates – I and Don’t Panic About Rates – II.
Who Are We?
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. Have you thought about doing a review of your current mortgage. 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.
