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Pending flood of mortgage fixing may drive rates higher, ANZ National warns
A flood of money from mortgage fixing may be pending as borrowers rush to fix mortgage rates ahead of wholesale rate rises, ANZ National economists have warned. ANZ, National Bank and ASB have raised fixed mortgage rates in the last few days, and there is an expectation that a flood of money will try to beat the collective market moving up, they said. A rush of mortgage fixing could force up wholesale interest rates and banks are likely to be more responsive to these rises than they were when there was a rush to fix in March, effectively dampening the incentive or opportunity to fix, they said. However, the pending flood of mortgage fixing would not have the same high levels as seen in March because of the current steepness of the rate curve, with the gap between one-year and five-year rates having widened over the year (see second tab of chart below). See all mortgage rates here.
In June, $37.5 billion of mortgages were on floating rates (24 percent of the total). This is up from $19.6 billion a year earlier (or 13 percent of the total). In addition, a further $58.2 billion of fixed mortgages are due to roll off in the next 12 months. Hence, collectively there is around $90 billion of mortgages that could potentially be fixed. (In March) Concerns that interest rates were set to rise and a reasonably upbeat statement from RBNZ Governor Bollard (at the time) led to a belief that borrowers had "missed the boat" on achieving low rates. During the month, there was an $8.8 billion reduction in mortgages on floating rates or with less than one-year to reset. This contributed to local swap rates rising up to 50bps over the month. While no one can really accurately say how much payside pressure accounted for this move, it clearly accentuated market movements at the time. In March there was a window of opportunity between the wholesale curve moving and actual lending rates rising. We expect banks to be far quicker this time around, in effect dampening the incentive (or opportunity) to fix. One of the reasons for the sharp reaction in wholesale rates in March was that the move by borrowers into the 5-year rate meant that traders had to try to clear this through the most liquid part of the curve and had to pay roughly twice as much 2-year to maintain duration. This time around, the shape of the mortgage curve is steep enough for us to believe a shift into 5-year fixing is not likely. Mortgage related paying remains a flow side risk to the local swaps market, particularly as we suspect the market remains "long". The large number on floating mortgages can effectively fix at any time without incurring break fees. While there is potential for mortgage related fixing to provide some underlying payside support to shorter-term swap rates (2-years and below) we doubt we will see the same flood as was the case in March, given the current steepness of the mortgage curve and other differentiating factors.
Well, we did warn them
Well, we did warn them didn't we! Rates are set to rise and keep on rising.
DONT FIX. its not rocket
DONT FIX. its not rocket science we dont have an inverse yield curve any more, we have joined normal countries that have normal central banks that dont beat the economy to death because there might be some inflation somewhere some time in some place.
We dont have central government spraying cash around, hopefully the local councils wont have 10% rate rises any more, power prices might better reflect the market. We might get fiscal policy working with monetary policy for once.
All you need then is proper capital markets so we can have something more exciting to invest in than a boring old house. Come on Weldon earn your wage for a change.
David - that would have
David - that would have to be the worst piece of financial advice given this year (apart from, perhaps, governments asking everyone to "spend more").
Those "normal central banks" that you speak of - they are the ones that have brought the global monetary system to the brink of collapse (staved off for now by massive money/paper printing). Nothing "normal" or rational in that methinks. They have set the fuse for high inflation and high interest rates in the coming years - even today's bunch of idiotic economists would have trouble refuting that cause and effect. In all likelihood, borrowers will win (IF THEY FIX FOR THE MAXIMUM TERM AND LET INFLATION TAKE CARE OF THE REST) and lenders will lose. That is the cost of not having sound money (that can be printed up or devalued on a whim).
Inflation is the worst tax of all, and is implemented because the masses are too dumb to understand it. Even a 5% inflation rate wipes $5k off a $100k saving EVERY YEAR. I fear that it will be far worse than that.
I agree David. After being
I agree David. After being burnt breaking my mortgages late last year I see no reason to fix anything longer than 2 years for the rest of my life!!!! I think its better to just go with the flow when it comes to fixing mortgage rates. I think there's still a lot of problems ahead of the world economy because of those greedy Wall Street pricks and there is still a wild ride ahead of us for financial markets. I believe that the floating and short term rates, although trending upwards, will stay low - in 2 years time floating will be still less than 7.5% and for 1 year, less than 6.5%. This is based on the reality that the OCR will stay at 3% or less for the next 12-18 months and the 1-year swap rates, while showing a marginal trend upwards, should remain relatively docile over the same period.
More Aussie banks lift fixed
More Aussie banks lift fixed rates- only a matter of time before it happens here
http://business.smh.com.au/business/commbank-lifts-fixed-rates-20090810-...
@ Ludwig Like your work
@ Ludwig
Like your work - well said
@ CBS68
What are you wanting 0% interest? it is fairly low nowadays (or more definitely was). I think there will be a fear like the Y2K bug when the Government Guarantee draws to a close, pushing rates higher, but i do see merit in floating for flexibility, keep you clear of break fees if you change you mind again... and one can always pay it down and retire debt without punishment...
@ President of Property Don't
@ President of Property
Don't want 0%, the current range for short term <6% is doing it for me right now - it would be nice to see the floating come closer to 6% or just under.
Yes, the flexibility and the ability to retire debt is what I'm looking for now so floating with a few short term - probably no more than 1 year fixes thrown in - will do very nicely thank you. You are also right that I certainly don't want to have to be in a position of being locked in with a fixed and at the mercy of the banks again.
I am not a financial expert, just an avid follower and reader of this website but I think if I can hold my position while others jump in and fix for 3+years now I'll be in a much better position than those people in a couple of years time. I see a bit of the old "missed the boat" fear that happened in March coming back into the market - with the banks talking it up to fix - over the next 3-4 months and people fixing when they would be better off to fix short and float in between for the next couple of years at least.
I must be in a glass half empty type mood because I still think there's a few more bits of bad news to come out of the US over the ext 12 or so months and I think that is going to wilt the green shoots people think they are seeing very quickly and the recovery time will be a bit longer than what we have seen to date.
ANZ has also come out
ANZ has also come out with statements pointing to greater pressure on assets in the years ahead. It's jibberish for falling asset prices. Not difficult to see the reasons why. Even less difficult to see how the ANZ and the other banks, were key players in setting up families for a lifetime of misery. The others sitting round the table were the govt, the RE liars, the mortgage brokers, the media and of course the 'mark', our very own silly Kiwi.
Ludwig NZs inflation problem has
Ludwig NZs inflation problem has always come from the non tradeable sector and am curious to know where you see inflation coming from in the next 18 months ?
The amount of wealth that has been destroyed overseas dwarves the amount of stimulus that has been pumped in. We still have the commercial property market to fall. What is to say that the Fed will not withdraw its stimuli as the economy recovers to head off inflation bearing in mind Greenspan is no longer there. Trichet is abrutal inflation hawk for Europe and Brown will be dumped in the UK and replaced by the conservatives.
Its not a given that we will suffer inflation but it is highly likely the world economy will limp along for a lot of years yet. Key and English are very aware and constantly articulate their re-balancing of the economy which is why I think we will see a normal yield curve.
Perhaps the swap rates are rising because the banks are forcing them up by preparing themselves for the surge of mortgages coming off fixed terms. I dont see anything else that has happened to cause a rise in longer dated swaps do you ?
Ludwig : The effects of
Ludwig : The effects of inflation are more insidious than most realise, because it compounds year after year. At 5 %, your spending power ( of an original lump sum ) is effectively halved in just 14 years. Inflation is the lazy way to re-float world economies out of the credit crunch. Ultimately , holders of cash and cash equivalents , get mugged by stealth ! And much of the cash in our economy is held by retirees. The little that is left over from the finance company's series of collapses , is gonna be crunted by central bank decrees. Put your cash to work !!!