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Brother in law's guide: Opt for variable mortgages rather than 1 or 2 year fixed rates
Here's the short version. I see a deep global economic recession in 2009 convincing the Reserve Bank to cut the OCR to 1.5% by mid-2009, meaning it's now sensible for home owners to roll their fixed rate mortgages over to either floating rate mortgages or 6 month mortgages to wait for rates to fall further. The one year rates offered right now look tempting at around 5.7%, but will lock borrowers in to a rate that will seem high in 6 months time. Variable mortgage rates will probably drop below 5% by early June, while fixed rates stay at or above 5%. Now that the Reserve Bank has cut the Official Cash Rate to a record low of 3.5% and has indicated it has plenty of room to cut further, it's worth looking at whether mortgage borrowers who are rolling over in the next couple of months should float or fix, and if they fix, for what period. This is actually quite a complex question. It requires a view on where the Official Cash Rate (OCR) is heading, what is happening to wholesale interest rates and what profit margins the banks may choose to impose on top of these wholesale rates. Essentially, it requires a view on the likely state of the global and New Zealand economies, along with an idea of the stability and profitability of the banking system.
Individuals will also have their own situations to consider. If a lump sum is expected in the near future such as a bonus, redundancy payment or inheritance it can make sense to go variable rather than fixed, even if the rate is higher because debt can be paid down early to save money. Or it may make sense to fix even though the cost is higher because a borrower wants certainty about their outgoings. Everyone's situation is different. This analysis is aimed at a 'typical' mortgage borrower who wants to find the lowest mortgage servicing costs for the forseeable future. I fit into that category, having a sizeable mortgage over the house I live in, so this counts as an analysis aimed at myself and for my brothers-in-law. So I'll call it the brother-in-law's guide. Now the caveats are out of the way, let's start. OCR to trough at 1.5% Firstly, let's look at where the Official Cash Rate will go over the coming 6 to 12 months, which is about as far out as anyone can sensibly forecast. I think a 1.5% OCR is now likely by the middle of this year, which would see variable mortgage rates drop to under 5% by the 4th OCR announcement of the year on June 11. Most economists are now saying the OCR will bottom out at around 2%. I'm a bit more pessimistic and I got a strong sense from today's press conference with Alan Bollard that's he's willing and feels he's able to cut very aggressively to get the economy back on track. The governor has rate cutting in his bones. His first act as governor was to cut rates. He said twice today he had significant ammunition in the locker to use if needed. He was referring to the OCR and to the Reserve Bank's Term Auction Facility to lend to the banks if they are unable to roll over their foreign debts. 
Also the news overnight (and most nights) from global markets and economies is just awful. Last night the IMF slashed its global growth forecast to just 0.5% and increased its credit losses forecast to US$2.2 trln. This will further hit the commodity prices we depend on and dry up demand for our other exports. Auckland International Airport is going to be a much quieter place over the next year or two. The other reason I think the Reserve Bank governor will choose to lean even heavier on the monetary policy lever is that the government doesn't have as much flexibility as many people think to crank up the fiscal stimulus lever much more. New Zealand is on notice from Standard and Poor's about a potential downgrade in its AA+ sovereign credit rating unless the government can get its forecasts of rising debt back under control. Alan Bollard may have to take up more of the load than Bill English. Variable to fall further than fixed Secondly, we are seeing the last gasp of New Zealanders' love affair with fixed rate mortgages, particularly the longer term two, three and five year versions. One reason is the obvious attraction of variable or short term mortgages when rates are falling. After all, why lock yourself into high rates in a falling market. But there's another powerful force at work. One of the reasons we fell in love with fixed rate mortgages is that our banks were able to get relatively cheap funding for them from very liquid international markets awash with money from the investment banking-led credit boom post 2002/03. Our banks would borrow for terms of one or two years for not much more than it cost them to borrow off each other on local markets. Now the Credit Crunch has destroyed the market for cheap, longer term funding on international wholesale markets and our banks are having to rely on relatively expensive local retail and corporate savers, or ruinously expensive international funding (if they can get their hands on it). 
The Reserve Bank is also pushing the banks to lengthen their funding maturities and borrow less offshore to reduce our vulnerability to the sort of financial market shocks we've seen in the last 18 months. The net result of these trends is that banks will not be able to offer vastly cheaper fixed rates than variable rates, now that variable rates are dropping like a stone. Bank profits are under pressure too. The profit margins they charge between wholesale rates and their fixed mortgage rates will, if anything, rise further. This will act to keep the pressure on longer term fixed rates to be higher than shorter term fixed and even variable rates. We finally may be able to get a positive yield curve. This sounds like something only interest rate anoraks like me should care about. But it is actually a return to a much healthier set of credit markets and sharpens the power of the Reserve Bank's monetary policy immensely. Alan Bollard was particularly chuffed today to point out that the average maturity for mortgages had dropped to less than 14 months from over 22 months in the last year. Bollard is helping to sharpen his axe by cutting rates so far and so fast that it encourages borrowers to move to variable rates. He could almost be accused of having an ulterior motive, and who would blame him for it. Flexibility the key The final reason for choosing variable or short term fixed rather than long term is that it gives borrowers the flexibility to fix when they see that rates have bottomed out. Being on a variable rate means a borrower can fix at the very moment it becomes clear to people that rates are about to start rebounding. My pick at this stage is that the OCR will have to be put up again in late 2009 or early 2010 as the enormously stimulative effects of these low interest rates, a low New Zealand dollar and the government's fiscal stimulus of 3% of GDP fire up the economy. Central banks around the world are also pumping cash into their systems and in some cases just plain printing money to revive their economies. At some stage all this fuel is going to catch fire and interest rates will take off again globally as central banks try to take away the punchbowl just as the party is getting started. To find out what all the banks are offering, check out our mortgage rates table, which is the most comprehensive, accurate and up-to-date around. A final note. I think this is what the RBNZ will do with OCR. This is different to what I think it should do. I think it should keep the OCR high because we have a national savings problem that can only be fixed with less spending and more saving. Cutting interest rates encourages exactly the opposite. We also have a domestic inflation problem which will not be fixed with record low interest rates. A final caveat. If there is a complete meltdown on international credit markets, which cannot be ruled out most nights at the moment, then there is a risk the credit market vigilantes that killed Iceland will pick on other current account deficit culprits like New Zealand, Spain, Ireland and Britain. We could see the warnings about our credit rating turn into a full scale rout of the New Zealand dollar and a complete freeze on foreign credit. That could potentially force the Reserve Bank to put rates back up to defend the New Zealand dollar. That's what happened in Iceland. That is one risk that could blow my 1.5% OCR forecast out of the water.
44 Comments
Isn't NZ just following the
Isn't NZ just following the US, I mean the NZ reserve bank is trying to defend the housing bubble just like the US Fed tried here.
We lowered rates here in the US hell rates here are almost 0% they tried this in Japan back in the 90's, none of this worked.
Why is NZ special what makes NZ different, why do NZ'rs think they are so special that what didn't work in the US or Japan will work in NZ.
All this government intervention is going to extend the pain and unlike the US NZ does not have the clout to spend money. The international creditors will not hesitate at taking NZ down.
David C, Spot on. Neither
David C,
Spot on.
Neither do I expect there will be low fixed term mortgage rates available for longer than very short durations when it becomes clear that rates are about to start rebounding.
Out of the frying pan and into the fire ...
Only differnce being that both
Only differnce being that both these countries have been operating in low interest rate environ. for quite some time ie last 4-5 years compared to NZ who will think having these low rate is Xmas.
PS...... took RBNZ ages to
PS...... took RBNZ ages to put them up last time and if anyone who paid over the odds for property and wants to do it again ie massive house price inflation again then they deserve to be burnt.
Interest rates may well be
Interest rates may well be low for a while - its because the economy is stuffed.
We are special though, in my opinion - I think there is a very real chance we will have the ignomy of being first into recession AND last out, thanks to our unique position in the global economy (ie exposure to dairy, in particular).
I think you are dead
I think you are dead right about the 1.5% OCR.that is what it is in the UK but they seem to have reached a floor for deposit rates and mortgage rates which is probably the inflation rate of 4% so what is the point?,nobody is going to loan money or invest money at less than the inflation rate.
With interest rates like the
With interest rates like the ones predicted, what do you do with cash... buy more proeprty!??
Bernard - your final caveat
Bernard - your final caveat is becoming an increasingly probable event. Those who have not done so already should be preparing to protect their assets (as much as they can) against this eventuality. The FX markets will be the final arbiter in all of this, and I for one have been working on the basis that their judgement will be harsh. However it will not require a meltdown in the markets to precipitate a run on the currency - nothing as drastic as that will be required.
Drelly, Those are nominal interest
Drelly,
Those are nominal interest rates. Credit contracted in December - the second month in succession. That spells deflation.
Nominal interest rates may by low, but the real interest rate is still high (most of which is not taxable). Versus a capital loss???
Depends whether you believe Bollard (the recession is over), or that a depression is developing. So far there are few signs to suport the former.
I'm guessing the Western retail
I'm guessing the Western retail banking sector, in cooperation with the Western Reserve Banks, want their savers deposits out of the bank accounts and into their shares.
Regulators and institutions are driving policy directly aimed at a recovery on Wall Street, hence the concerted effort to discourage savings and ignore inflationary effects.
I think NZ is being
I think NZ is being run by a bunch of idiots at the moment. Why don't they listen to Gareth Morgan, who is someone who actually knows what he is talking about, and I believe much what he is saying is right. Bollard should go, thats for sure. We are heading for a depression, there is no sugar coating it. Many people are thinking it, but no one wants to say it, in case it comes true.
@ Nick - "compared to
@ Nick - "compared to NZ who will think having these low rate is Xmas." They won't while they are worried about losing their jobs (which will be the next leg down for the NZ economy).
@IanC - "thanks to our unique position in the global economy (ie exposure to dairy, in particular)." Not to mention tourism!
@Drelly - During periods of asset deflation you want to be in cash. While you might not earn much interest, your purchasing power will increase as stocks/property etc become cheaper.
I hope George Soros isnt
I hope George Soros isnt following all this...............
it's called Christmas not Xmas,
it's called Christmas not Xmas, although some might get be getting more than the usual three/four weeks off - like a DCM (Don't come Monday)
i also now see room for further rate drops, but would like my borrowing position confirmed, so as rates drop i see more breathing space before jumping in with more borrowings.
although it can be confiscated, at least real estate is real - you can drive past it or bang a nail in the wall, that been said, certificates for other investments can come in handy though when it all turns brown, but for other reasons...
rc - quite so, you
rc - quite so, you can bet Mr Soros is watching this with increasing interest.........
Andy H I think if
Andy H
I think if that happened, We would see emergency legislation to fix the NZD to the AUD (which should have happened a long time ago)
Rob
As for "Listen to Gareth Morgan", the mans an economist, they are the ones that caused this situation, he may be NZ answer to Roubini but how many solutions has he come up with?
The current thinking is stimulus via low interest rates and quantitative easing (more money) when the interest rates hit nil, but this will not return "growth", We need to soften the landing because complex systems do not react well to violent change, just as all these companies in the US are finding, slashing jobs does not improve the company, but it might save it, either way there is going to be a depression, as the system re-adjusts.
Armchair economists that suggest higher interest rates (Like BH) don't realize this and they want to protect "savings" via their returns, this is wishful thinking as well as it requires a return to business as usual because interest is simply a lien on future production and if there isn't "growth", this lien acts like an anchor. This is the same conundrum that faces OPEC, they are cutting production to increase the price, but the ability to pay is dictated by the ability of the importers to convert Oil into Wealth so...cutting the supply is counterproductive.
The Governments that face increasing their interest rates from near nil, ie the UK & US will HAVE to do so in order to protect their currencies ie their sovereign wealth, unfortunately this will be a kick in the balls to their economies in a contraction phase and hence it will be an action of last resort.
In short all these issues, interest rates, currency, energy flow & food are exacerbated by nationalism, We all strive for a better life than all other countries, it is also the fraud of the socialists, ie that socialism is fine but only within my borders.
The answer is simple if somewhat unpalatable....produce more sustainably and consume less.
Neven
great commentary, yes ocr rates
great commentary, yes ocr rates will hit 2% in June, thats a given which should mean fixed rates @ 4-4.5 which is fantastic for borrowing. If the economy becomes stable and thats a big if, people will re enter property probably at lower levels ie investment and first home buyers, why well theres no return in the bank, shares are high risk orbeit a possible attraction for those who can afford to take the risk, however property is bricks and mortor, kiwis love to see and touch there assets and will be prepared to hold for the predicted upturn, also figures suggest a shortgage of property to meet our requirements(note building consents figures), so renting will become even more popular for those who cant afford a 20% deposit and those who dont have good job security or dont want the stress(Ie Auckland residents) this equates to a building renter demand which will compliment the investment option for those who have savings they want to sequre via investment property. Commercial property will also become popular or though rent rise movement will be low to nil but returns will still be around 6-8% which is a much more viable return when options considered and once again it bricks and mortor. For mine an improvement in real estate turnover and a slight rise in values but not significant until 2010-2011 as the economy improves, my pick June jump into property market, hold and double your money 2013, opportunity knocks for those who can position themselves correctly
Mark H
Andy h just following up
Andy h just following up on a comment you made a while ago about NZ S&P rating ,,,,just watched a very interesting interveiw with Joseph Stiegletz basically bagging the validity of ratings agencies so even if we do get a downgrade do you expect the Currency market to react as adversely to this as perhaps 18 months ago?
Mark h just prior to
Mark h just prior to RWC was where we thought it would start to show signs of Spring Bloom.
Rental properties till too expensive on yeilds they need to fall futher ........I guess closer to a 10% yeild (commercial) given uncertainty with some business models of tennants.
Scott quite right if they
Scott quite right if they spent or geared themselves without putitng something away for a rainy day but if unemployment reaches 10%.... 90% of us will still be employed.
Neven Aus big trading partner
Neven
Aus big trading partner (Banks making fortune out of NZ anyway 2.8B last year) so better for our currency to be weaker against AUD.
Love your blurb Mark. I
Love your blurb Mark.
I completely agree with you timing assumptions and am cashing/ saving up as i have what i feel is an essentially 'recession proof' occupation.
The most important factor for me will be when the market will bounce back because coming to that time i will hopefully will be up to my eyeballs with capital debt!:)
Apologies if this has been
Apologies if this has been covered before but there is another aspect of Bollard's ultra low policy rate that should be ringing alarm bells. In the period up to the last peak in interest rates Bollard made much of the fact that his policy was failing to gain much traction because so many borrowers were insulated from interest rate rises by fixed rate deals they had signed previously. In fact I think he went so far as to claim that rates had to go higher than they would have had these fixed rates not buffered so many borrowers. Now Bernard has already noted that as rates fall more and more borrowers are jumping off fixed rates onto the variable rate (entirely logical), and I think went so far as to say Bollard would be pleased with this outcome as it meant 'traction' would be returning to his policy. But hang on a minute, this carries a huge risk! If rates continue (say for another 6-9 months) at these very low rates, the number of borrowers opting for variable rates will mushroom as more and more come off existing rates (never mind even having to break existing deals). If they have any sense at all they will, at the merest hint (if not before) that interest rates will fall no further, immediately jump on the longest term fixed rate they can get (5 years would be a obvious). At a stroke Bollard would have lost the ability to subsequently influence the spending patterns of a huge swathe of borrowers by subsequent interest rate policy. If there is a sustained recovery in say 2010 the liklihood is (because of the huge monetary stimulus) that there will be a burst of inflation which Bollard would then seek to control with interest rates. Huge problem - a massive tranche of borrowers won't care less what he does with interest rates for the next 5 years. He will have the 'loss of traction' problem he complained about in 2006/7 in spades.
Feel free to shoot the above down but I am temped to file this in the bleedin obvious out-tray.
Good point Andy, and correct
Good point Andy, and correct but remember in times of economic upturn(1010-1011) onwards the rb does need to stimulate the economy through interest rates. Infact it normally rises them to slow the economy and control inflation as we have seen recently. Economy cycles traditionally are 5-7 years. However the current situation sits outside the norm providing higher than normal levels of uncertaintly and that only fosters a longer down time.
I worry that borrowers are
I worry that borrowers are being led like lambs to the slaughter. In times of high interest rates - there's heaps of credit - in times of low interest rates - credit is restricted. And borrowing to cashflow either your business (overdraft), or your household (credit card) remains constantly high, no matter what.
There is no getting ahead through investment that requires "support" from these institutions.
I recommend investment in only that which one can afford without borrowing until such time as the dust settles in the corporate West after the mega-economies get around to either nationalisation and/or regulation to lower volatility and bring this sector under control.
Problem as I see it presently, the financial sector is still 'gaming' the system - taking taxpayer handouts and using it in their, not the public, interest.
Andy - absolutely spot on.
Andy - absolutely spot on. In the UK a small % of cashed up buyers have been out in force - A slight rise in mortgages in Dec. http://news.bbc.co.uk/1/hi/business/7860108.stm
A small section of the population is going to benefit hugely but some of those same 'risk takers' will lose everything as unemployment kicks in even further (and it gets very much worse by the day). A sorting out of the men from the boys, or more aptly, the income dependant from the income immune. As I have said before "˜time' (to wait it out) is now the most valuable commodity of all.
Need I say "¦.feel free to shoot the above down but I am temped to file this in the bleedin obvious out-tray
Kate Banking - gaming; a
Kate
Banking - gaming; a synonym no less.
What is the bet our new social landlords are going to be the very institutions that got us into this mess in the first place and then foreclosed on the houses of the most recently mortgaged (last 5-10years) and financially stupid taxpayers that funded the bailouts. The question is, will the people revolt if the likes of Northern Rock morph into their new social landlord as opposed to their former mortgage lender. The confluence of socialism and the new right is truly remarkable - labour has been so naive. NZ is a prime example of this, huge tax payer subsidies for the wealthy to supply housing for the very people that pay for their so called benevolence. How do we revolt these days - beyond blogs like this (that are ironically supported by the finance industry)? It's a weird kind of freedom that exists in principal only.
sharonv - yes, how do
sharonv - yes, how do we revolt is a really good question - and so far the only thing I can think of is not to play in their sandpit. Which means no or reduced borrowing and support for trade/barter directly with people/organisations. I noticed a media article about non-Western nations already moving toward trade barter in terms of commodities.
Yes read the same article
Yes read the same article Kate. On the plus side bartering squeezes out the commodity speculators, eliminates the need for expensive credit and provides a ready solution to feeding the population. So it cannot be a bad thing to go backwards in order to go forward. It's just a change of direction really - they will not follow the West to the bottom of the cliff as a preferred destination. Raf has talked quietly for the last 18 months on the alternatives to corporate finance and Iain has more than persevered in his efforts to get us to think this problem from a different angle. It's been useful, there are options. Once we start thinking differently it becomes natural to 'act' differently.
SharpnV and Kate ....I have
SharpnV and Kate ....I have made barter suggestions previously.
Pity Fonterra did not have warehouses full of rice rather than dairy products then the could barter for Toyota's stacked up inventory of cars or Sony's Bravia TV's. Unfortunately for NZ JApan has a big dairy industry too (mainly in Hokkaido a smaller concentraton on Awaji Is not too far from Osaka)
Japan has a problem in that it has to import a lot of rice due to stopping farmers growing it. They even import substantially from the USA .Importing rice rather than growing it was a means of adjusting the trade imbalance. There are similar food supply disasters unfolding in South America. The worldwide economic situation grows increasingly complex by the day!
The problem now not all just about cars, t.v's houses and cows anymore as some others on this site have indicated!
Barter to survive might be a new paradigm as nations find they need to feed the hungry ????????? Then that leads to bigger problems I don't even want to think about.Have you noticed the Nth Sth Korea animosity escalating and rumble's from the rouble boss and China putting blame on the USA for their current economic problems?
Sharonv, further adding to to your comment about 'natural to act' There is increasing evidence many nations seem to be reverting to a culturally patriotic basis rather than the US$ induced global principles and are now invoking (self) protectionism in an effort to stimulate and protect their own economy.
Yep, saw those reports out
Yep, saw those reports out of Davos - but of course the new US administration fired the first salvo at China with its 'currency manipulator' comment. What's odd is to actually find any official from China making any comment/response at all. Very interesting.
Andy, your concern about people
Andy, your concern about people jumping on to 5-year fixed rates assumes these will be attractive and under-priced options. But if the yield curve goes positive, this will not necessarily be the case. Rather, expectations of interest rates increases will be built into the price. So choosing floating over long term fixed should be a relatively neutral set of options.
BTW - current events show that the negative yield curve made the right prediction. Wouldn't you just know it - markets work! (Unless they are overwhelmed by moral hazards, as in the credit crunch.)
Tonz Nationalism is rearing its
Tonz
Nationalism is rearing its ugly head here in the UK 'unofficial nationwide strikes' in protest of hiring foreign workers.
http://news.bbc.co.uk/1/hi/uk_politics/7860593.stm
Have always been proud of the Kiwi accent but suspect it might wise to cultivate a Londonstan twist to it.
But it said in the
But it said in the Herald....
"Neither mortgage rates nor property prices are likely to fall much more, says BNZ chief economist Tony Alexander, who tips three to five-year mortgage rates to bottom around 5.5 per cent in coming weeks."
Mwha ha ha, Tony "Roald Dahl" Alexander.
And this gem from the
And this gem from the 'property information' web site 'Zoodle'
http://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=1055...
..."A new property information website is predicting a 50 per cent increase in property sales over the next two years."
FFS - do they think we are all retarded? Or am I being slightly harsh?
expat - A 50% increase
expat - A 50% increase in sales would still leave volumes well behind 06-07 levels. I think reading your comment they would suspect you're right about the retarded bit.
I sorry but every time
I sorry but every time there is any faint straw to be grasped the property professionals seem to feed it out as beacon of hope and a talisman for burgeoning investors to take to heart.
So I suspect you are correct, the property numpties do indeed think the NZ public are retarded and will believe any old shite they spin.
Largest boom in the past 100 or so years etc, eh?!
Heh - I thought an
Heh - I thought an honest headline for that Zoodle article would be:
"Turkey's confident no Christmas this year."
Are you prepared to put
Are you prepared to put a gaurantee on your claims or is this just another throw away comment with no consequences?
------------------------------------------------------------ exp
------------------------------------------------------------
expat Says:
February 1st, 2009 at 7:48 am
But it said in the Herald"¦.
"Neither mortgage rates nor property prices are likely to fall much more, says BNZ chief economist Tony Alexander, who tips three to five-year mortgage rates to bottom around 5.5 per cent in coming weeks."
Mwha ha ha, Tony "Roald Dahl" Alexander.
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Just in today.. expat
ASB has increased its three, four, and five year mortgage rates by 10, 20 and 30 basis points to 6.05%, 6.15% and 6.25% respectively. They had all previously been cut to 5.95% in the immediate aftermath of the Reserve Bank's last rate cut.
This is the first time this year a bank has increased a mortgage rate.
------------------------------------------------------------------------------
Sooo, now what can we expect? All the banks to scramble up again, ala petrol companies?
Seems as if ASB thinks they went too low, and are re adjusting inline with others.. or perhaps they think something else
I think, wait and see ... I still don't get a feeling of "panic" out there
I think Roald Dahl was a fantastic explorer.. Tony? well, he didn't miss the mark by much :)
Apart from the perpetual "Nay
Apart from the perpetual "Nay Sayers", I'm not aware of any economist who predicted the recession, let alone the collapse of 25 Finance Companies over the last 24 months.
It's crystal ball gazing time again for all the Banks & their economists as they position themselves to take advantage of any triggerhappy punters trying to pick the bottom of the market but firing too soon.
I believe it was Oscar Wilde who was quoted as saying "if you line up all the worlds economists they still won't reach a conclusion".
Bring on 1.5% - 2.0% OCR I say... I only hope we don't see further profiteering by the Banks in not passing on the points to their earerly awaiting borrowers. We might simply see lower variable rates and minimal change in the medium and long term rates (i.e. 3-5yr). I'm dusting off my crystal Ball :-)
Weatherman, Ravi Patra made a
Weatherman, Ravi Patra made a prediction of a great depression but it seem to be happening later than he predicted. "The Great Depression" is the title of his famous book...
Great info, in particular because
Great info, in particular because I'm due off fixed in 6-weeks time!
Could you do us a favour and underline links instead of bolding them? It was hard to see the Mortgage Rates Table you linked too when you had bolded a couple of other words a paragraph down.
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