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Mortgage rate hikes: ‘Don’t wait to see the whites of Alan’s eyes,’ Westpac says
October 27th, 2009Westpac economists have warned borrowers about waiting to see the ‘whites of the Reserve Bank’s eyes’ before locking in a fixed mortgage after the latest round of rate increases saw some banks start to hike six month mortgage rates.
In their weekly commentary, Westpac’s economists said it now appeared no point on the mortgage rate curve was safe and that there is a strong risk “that we could see borrowers rush to fix at whatever favourable rates are still on offer”. Their full comment is included below.
A rush by borrowers to fix at low rates in March this year caused swap rates to jump and led to an increase in fixed mortgage rates as banks moved to hedge their borrowing, particularly for the two year term. However this time around, lower variable and six-month rates than in March have meant not as many borrowers rushed to fix for longer terms at low rates, with more opting for lower variable and short term options.
Wholesale interest rates have spiked up in recent weeks as markets see the Reserve Bank raising the Official Cash Rate in the first half of 2010, as opposed to the latter part, which the RBNZ has indicated in its four previous OCR statements. Swap rates, barring one year rates, are now at their highest points this year, with the one year swap rate at its highest since mid-January.
The two year swap rate is now sitting around 4.81%, its highest level since early December last year, while the ten year swap rate at 6.21% is at its highest level since mid-November.
Here are the comments by the Westpac economists:
Some banks have started to lift their six-month fixed mortgage rates – until now this was the only fixed term that had been left unscathed by rate increases. Now that it appears no point on the mortgage curve is ‘safe’, there is a strong risk that we could see borrowers rush to fix at whatever favourable rates are still on offer.
With floating and one-year fixed rates around similar levels, there may not seem to be much advantage in fixing right now, but those who wait until they see the whites of the RBNZ’s eyes before fixing are likely to face much less attractive options. Repaying more than the minimum amount and spreading the loan over a mix of terms can help to reduce overall risk regarding uncertain future interest rate changes.
Tags: Alan Bollard, fixed mortgage rates, Interest Rates, Mortgage rates, OCR, RBNZ, Reserve Bank of New Zealand, Westpac
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October 27th, 2009 at 1:33 pm
where were they in march when TA got it right? wouldn’t put too much weight behind BO’d or any of his crew – rather useless advice about nothing in this speculative nonsense. additionally to wait until you can see the whites of the eyes means don’t go shooting off all your ammo until you can see, take aim and be effective against what your really facing.
i think they are churning out “one D one IT” errors/advice over there in westpac land
as TA put it if you didn’t fix back in march or since then, you may as well float now and reduce debt while you can…
October 27th, 2009 at 1:51 pm
Almost too late now! Long term floating rates (3-5 years) are almost back to where they were 2 years ago. An opportunity missed.. Some people I know locked in their 5 yrs rate at 6.39% – and my memory recalled these low rates lasted barely two weeks.
October 27th, 2009 at 2:23 pm
Agree, it’s already too late to fix now – I would like to think Governor Bollard is a man of his word and keep the OCR as it is until the end of next year.
If we were facing another international downturn as others suggest then fixing at a high interest rate would not be the best option, but rather paying off debt as fast as you can and if possibe save cash for a possible worse case scenario of losing ones job.
October 27th, 2009 at 2:33 pm
@J.S. Trouble is Bollard could keep it, but if that means in November and December 2010 he does 2 x 100 basis points rises or even more? It would seem to be more sensible to raise gradually say 25 points per 6 weeks than slam ppl this time next year….
If he needs to raise that is, there seems to be an assumption he has to. For me its not that clear the raise is guaranteed next year….If we go into a double dip recession, then why would he or even could he raise at all?
Otherwise I agree now its too late to fix, unless you believe that the OCR is going to say 12% within 2 years…in which case….PANIC!!!!
;]
regards
October 27th, 2009 at 2:35 pm
@JS: “losing ones job” Yep, also if floating you can sell without a huge penalty…flexibility…
regards
October 27th, 2009 at 3:12 pm
Interestingly in a rising interest rate environment you don’t face the same early repayment fee issues when repaying a fixed rate loan as is the case in a falling interest rate environment (not that this means that there aren’t advantages to having at least a portion variable).
Under the new Credit Contracts act Lenders can only charge their loss as a result of the early repayment. If at the time of repayment the new fixed interest rate is higher then the bank hasn’t suffered any loss and can’t charge you if you decide to repay early.
October 27th, 2009 at 3:15 pm
Don’t fix, don’t buy. Rent. Simple.
October 27th, 2009 at 4:40 pm
Steven – good point
Markymark – you sure about that willis???
October 27th, 2009 at 4:49 pm
I’m not sure that I would make early payment of a fixed term borrowing in a rising interest rate environment. Why give back ‘getting-cheaper’ money? So your point may be purely academic, Marky mark…
Rule No 1: Don’t give the money back if you don’t have to! You may not get it again….
October 27th, 2009 at 6:08 pm
Harriet – I agree.
President of Property – Ok, I’ll ‘run that by you again’.
Yes I’m 95%+ sure. As with all rules there are exceptions but I don’t believe that they will ever apply in the standard big bank lender retail customer situation.
The CCCF Act provides a ’safe harbour’ method/formula which banks can use to calculate the early repayment fee (they can chose their own formula but it must work on the same principles).
The formula is set out in the Credit Contracts and Consumer Finance Act Regulations 2004
(if you google that you can get a pdf of the regs). The example makes clear that the bank’s loss on early repayment will be zero if interest rates have risen.
Also the Ministry of Consumer Affairs produced a document explaining the Act to lenders
http://www.consumeraffairs.govt.nz/businessinfo/cccfa/cccfa2003/Bus-note-creditors/cccfa-payments.html
“A fee that covers a reasonable estimate of your loss is a fee that compensates you for this foregone return.
Obviously, you will have only suffered a loss if your prevailing interest rate has dropped since you entered into the original contract.”
October 27th, 2009 at 6:30 pm
Harriet: Lending criteria are supposedly tightening; but my experience has been this year “how much? OK but there’s a few more strings”. With the proviso that’s it’s for housing not for anything useful like a business.
Marky mark: I was wondering about that. Might ring my bank with a spec query….
October 27th, 2009 at 6:36 pm
@Steven, agree, gradual increases would be preferred, but hopefully Governor Bollard won’t need to raise the OCR at all as the average persons basic costs rise quicker than rises in income.
@Harriet, I once believed that too. I now believe better no debt or to pay off debt when I can ‘though I don’t need to than to pay off debt when I have to, but can’t afford to.
October 27th, 2009 at 6:37 pm
I am bemused that people are still puzzled as to why rates have to rise. I can only guess they must think living in a bubble as we are, prevents somebody stabbing the bloody thing with a freaking big needle. Once again, the easy answer…credit is starting to cost more because more is being borrowed than exists to be loaned out. The trillions that must be borrowed in the United Socialist States of America to balance the budget, will on their own lead to higher rates. Throw in the UK and all the other stupidity to get the combined kick up the proverbial borrowers bum. ….No…that’s not the end of it….we have all the QE stupidity that has already gone on with more to come….the reason why smart money has run away to buy into commodities and NO the rush has only just started…the consequence being more expensive imports….that’s why John Key has said the higher Kiwi has provided some inflation protection….get the picture…but the Kiwi cannot hide all the cost increases and so imported inflation approaches….up pops the wage disputes and demands for more pay….along comes Bollard with ocr hikes to stamp out any wage spiral…and don’t forget the 40 billion English has to borrow just to balance the budget and it could be a dam sight more….all in all, a sure fire recipe for rates to rise and rise just like we had back in the 70s.
October 27th, 2009 at 6:45 pm
Marky Mark
Thank you for that – it just seems there is a squirm hole made especially for special circumstances, and having had a shitefight when rates were on the way down when my real calculated cost to the bank of breaking the loan was about 15 times less than what they wanted to charge with their own formulated formula (i have posted the equation here before)
i just thought they might have a crazy unjustifiable calculation for when they were on the way up too…
October 27th, 2009 at 9:21 pm
A second wave of recession is coming in 2010, those who remain floating for another 12 months will almost certainly be able to fix long term late next year at rates that will be lower than they are today and Bollard will have to cut at least another half a percent off the OCR before December 2010.
October 27th, 2009 at 9:34 pm
2nd wave is already here in aus
October 27th, 2009 at 9:57 pm
@ pwilkie
“2nd wave is already here in aus”
Tell us about it.
October 27th, 2009 at 9:58 pm
pwilkie,
what do you mean that “2nd wave is already here in aus”? is there any sign showing there?
October 27th, 2009 at 10:06 pm
Re:The Bank Manager
I agree. I’m going to take a punt and sit at the short end of the fixed curve and see what happens……
October 27th, 2009 at 10:27 pm
i .m from brisbane –i,m originally from north otago. i work in the building industry[or did] i,m a commercial roofer . the building industry has crashed badly in the last 2 months-both commercial+domestic.i personally have not worked properly for the last month.[i,m running out of stuff to fix around my joint.]the banks are not lending to the developers hence no new stuff coming on. also the federal govt has canned theist
home owners grant–it was 21 grand–now 7this ended in september. realestate is going no where at present no buyers or sellers — prices back 10–15 % from a year.
unemployement at 6.6% but will explode before christmas –all my builder mates/customers have been keeping their guys on with reduced hours etc but chrunch time is approaching unfortunately.the courier mail[brissie main paper] job section on saturdays edition ayear ago was about 60 pages — at present 15 and half of them arn,t jobs–training etc
October 27th, 2009 at 11:03 pm
god damn it I’m with the Bank Manager as well and I’m going to ride the floating – yee-ha. Banks are just trying to spook the sheeple into fixed rate loans and start that whole vicious cycle again. I got out of my 5 year fixed at the start of 2009 and I vowed I’d never be caught out like that again e.g. ginormous ERA penalty!!!. I have been floating while keeping my repayments high and nailing my principal and it has to be one of the most satifying things in the world to see your mortgage dropping by a couple of grand a month and knowing that you are one step closer from not having to depend on those thieving bastards at the banks – I am going to continue in that vein because the fat lady hasn’t sung yet and I think she has another beauty in store for us all.
October 27th, 2009 at 11:11 pm
pwilkie,
how is the retail sector doing there? what about the export sectors, any news reports that you could tell us?
October 27th, 2009 at 11:31 pm
CBS68 – you are onto it mate!
pwilkie – the whole commercial real estate/development industry here is also stuffed and heading for a complete cleanout. Like Aus the banks here are not prepared to finance any commercial/development activity and in many cases have been forced to become “bankers in charge” of failed or failing projects.
Commercial real estate is likely to be the next big collapse here as inability to refinance kicks in and it’s gona kick hard.
October 27th, 2009 at 11:31 pm
sorry about the grammer last time. retail is still surprisingly good–we have some supercheap shops to build possibly early next year although they have been put back twice.shopping centres packed.i only know about the coal industry–seems to be going alright at present although the grape vine say,s the chinese are stock piling.our qld state govt is broke–they are in the process of selling ulitilies–queenslandrail+ power co,s for 15 billion–people generally not happy with decision [unions]
re banks- lending criteria very tight–lots of equity required — no overtime factored into
proof of income[not that there is any at present]people doing small reno,s -[kitchens etc] instead of moving
October 28th, 2009 at 12:13 am
pwilkie,
wow, sounds scary. Do you know who are they selling the utilities and rails co. to? which country is showing interest?
October 28th, 2009 at 12:42 am
they,ll be sold to superfunds+other big players[bhp etc] hopefully not the chinese.
there have not been any names put about yet.this state govt, has been playing catchup on infastructure–bridge,s tunnels hi way,s etc–they didn,t do any thing for the last 10 years this is what the15 b is for plus they have lost a lot of royality income from the mining down turn.federal govt no better–borrowed stimuli s money —gst 15% shortly?
10% at present
October 28th, 2009 at 8:45 am
Why are the banks so keen to lock ppl in?
1) They are raising short and long term rates because they are afraid of making a loss IF Bollard raises the OCR….this seems sane business…no loss made…
on the other hand…
2) They are saying lock in now before we raise more….this doesn’t seem good business sense…..we might make a loss….1 != 2
I personally dont think we are seeing the whole truth yet….something is missing for me in this.
regards
October 28th, 2009 at 8:48 am
@The BM & CBS68: Welcome to the “second recession” club….
;]
October 28th, 2009 at 9:02 am
@Wally: “I am bemused that people are still puzzled as to why rates have to rise. ” Im glad you have laid out why you think so, but, this is because you are possibly not taking into account other factors…
1) This is an extreme situation, Im not convinced by a long way that traditional economics is appropriate….ie print money == inflation. Printing money assumes there is more money in the system….if that is not the case then its not inflationary…so a) banks are keeping the $ and not lending it out…b) Hedge funds and speculators have lost a truckload of $, 12~14Trillion is estimated as lost, yet the USA and world has maybe injected 2Trillion….that’s still a 10Trillion hole….
2) There is the real economy and the paper/financial economy…the real economy ie the productive one that makes goods is still in a bad way and has excess capacity, a lot….the financial/paper economy is a bubble and its killing the real one…by buying assets and commodities…
So for me I think we face deflation/recession….and more bubble bursts….in such a situation then Inflation may indeed / could well be not an issue….yet…
regards
October 28th, 2009 at 9:17 am
I think the independence of the RBNZ is a fiction. I think the banks are in control of the country and the Cabinet too gutless to do more than pump out humbug. Labour were too stupid to realise what fools they were. National, too wary of hurting their support base and chummy banking relationship. For these reasons this country has entered an age of serfdom from which it will not escape unless there is a total cleanout in wgtn. Only massive civil unrest will achieve that.