This article contains time sensitive advice about what you need to think about in the next 3 days before the next Reserve Bank OCR change on Thursday 12th April 2014.
We are in a low growth market with intense competition from banks for market share. The year-on-year mortgage growth rate has gone from 6% in October last year to 5.4% now. Last month grew by 4.00% annualised so its heading down. In recent times, the result of this competitive environment has been a fall in bank mortgage margins. In April 2013 the carded margin for a 2 year fixed was 2.60%. Today, this has decreased to 1.90%. When all is said and done, the fight for market share ends up with a focus on price. Credit policy used to play a role but that has become less relevant with the Reserve Bank focus on over 80% lending and on property investors with more than 5 properties. When it comes to price, banks made a windfall profit when homeowners switched from fixed rates into floating rates from 2009 onwards. Typically banks do not compete on floating rate loans because any rate change impacts its entire portfolio. The cost of any price change far outweighs any benefit from additional volume. This is why bank margins are so much higher on floating rate loans – competing down margins is not to any lenders advantage. That is why you will continue to see competition focused on the 2 year fixed rate.
We've had a "Squirrel" house view for sometime that mortgage rates will stay lower for longer. That view has not changed and we do not expect to see mortgage rates go over 7.00% for a long while yet. For our previous discussion on this, read Mortgage Rate Strategies. Mortgage rates are however about to tip over 6.00% and that shift will have a disproportionate impact.
There is an advantage to banks promoting headline rates below 6.00%. 5.95% looks far more attractive than 6.00%. More recently rates have drifted even lower as a result of banks trying to outdo each other in this term. Smaller banks would usually be given a bit of license to have rates below the major banks but not in this market. The impact of Kiwi Bank of the major incumbents is not to be under-estimated along with the ANZ National merger which has given ANZ (1) a cost advantage and (2) an opportunity to reset shareholder expectations. On the demand side, Kiwis are far more sensitive to interest rates now, more aware of their options and the deals available, and also more conscious of the impact higher interest rates will have on their disposable income. It is hard to adjust to increasing mortgage costs (as it is a genuine cost increase that has to be funded from somewhere.) Many Kiwis have already had to adjust to mortgage rate increases from 4.9% to 5.80%.
The OCR is highly likely to increase again this week by another 0.25% from 3.00% to 3.25%. Whereas the last two OCR increases didn’t result in an increase in fixed mortgage rates, the reality is that this time I think margins have become too low for banks to absorb an increase through reduced margin. The other point is that once rates are above 6.00% the banks loose the incentive to try and provide a rate below 6.00% so we’re likely to see them try and clawback a bit more margin. Provided the Reserve Bank continues with their rhetoric around the need for higher rates, then I suspect 2 year fixed mortgage rates will quickly move from 5.85% to 6.25%. .
If you are on a floating rate I would suggest fixing that now for 2 years at 5.85%. Chances are this is close to your existing floating rate, so it’s really a free option to get 2 years worth of rate stability and will more than likely out-perform the floating rate (in terms of interest cost over time.) To do that, you can email us on email@example.com and we'll get on to that straight away for you.
It would be worth breaking this and fixing it now. We can review your whole mortgage at the same time. If you’re in this situation and want us to quickly assess options then also email us at firstname.lastname@example.org.
If you’re on an excellent fixed rate of say 4.99% and still have a year to go then you’re better off sticking with your existing loan and dealing with rates once it matures. By breaking it now you’ll lose the benefit of a rate that is 0.80% below the current rate. By breaking it now, your beat is that the 2 year fixed rate will be above 6.60% in 12 months time. Otherwise it is not economic to break. I personally think the probability of that is 50/50 so not worth the effort unless you have tight servicing and are worried about the impact of higher rates. In that situation I would break now but fix for 3 or 4 years. Feel free to call us on 09 376 9688 (and Press 1) if you want to discuss your particular situation.