Home owners rolling over fixed rate mortgages this coming week face some sticker shock. But they don't face as much as they could because bank margins have become very compressed.
How long they will stay compressed is anyone's guess.
Wholesale swap rates are rising very fast now, almost too fast for banks to keep up. These couldn't really come at a worse time for them because their main use for the funds they want to lend (and need to hedge) is in the housing market that is currently struggling to expand.
The tables below show just how much wholesale swap rates have risen, and how the biggest restraint is for two year fixed mortgages. This is also the biggest risk for homeowners when that restraint ends.
Moves last week started by ANZ, and followed by ASB and Westpac suggest banks generally are ambivalent about building back margin in this tight market. ASB and Westpac didn't rise as much as ANZ. And BNZ and Kiwibank have yet to move. We do expect them to move very soon - perhaps even before we have finish drafting this analysis.
Here is how things stand for borrowers who took out a one year fixed rate mortgage a year ago:
| ANZ | ASB | BNZ | Kiwibank | Westpac | ||
| 1 year | ||||||
| 27-Sep-22 | Swap | 4.50% | 4.50% | 4.50% | 4.50% | 4.50% |
| Fixed rate | 5.45% | 5.45% | 5.15% | 4.95% | 5.45% | |
| margin | 0.96% | 0.96% | 0.66% | 0.46% | 0.96% | |
| 27-Sep-21 | Swap | 1.11% | 1.11% | 1.11% | 1.11% | 1.11% |
| Fixed rate | 2.60% | 2.85% | 2.85% | 2.95% | 2.85% | |
| margin | 1.49% | 1.74% | 1.74% | 1.84% | 1.74% |
This shows the extreme margin compression currently at both BNZ and Kiwibank, which is why we think they will more rates very soon.
The table also shows how far generally margins have compressed in a year.
And here is how things stand for borrowers who took out a two year fixed rate mortgage 2 years ago:
| ANZ | ASB | BNZ | Kiwibank | Westpac | ||
| 2 years | ||||||
| 27-Sep-22 | Swap | 4.62% | 4.62% | 4.62% | 4.62% | 4.62% |
| Fixed rate | 5.75% | 5.75% | 5.39% | 5.45% | 5.65% | |
| margin | 1.13% | 1.13% | 0.77% | 0.83% | 1.03% | |
| 27-Sep-20 | Swap | 0.04% | 0.04% | 0.04% | 0.04% | 0.04% |
| Fixed rate | 2.69% | 2.69% | 2.69% | 2.79% | 2.69% | |
| margin | 2.65% | 2.65% | 2.65% | 2.75% | 2.65% |
The story is similar for the two year fixed mortgage segment, but margins aren't as low, but they have compressed more over these two years. The two year swap rate was unusually low two years ago. They got even lower through to mid-November 2020, but then they started rising again soon after that.
And here is how things stand for borrowers who took out a three year fixed rate mortgage 3 years ago:
| ANZ | ASB | BNZ | Kiwibank | Westpac | ||
| 3 year | ||||||
| 27-Sep-22 | Swap | 4.55% | 4.55% | 4.55% | 4.55% | 4.55% |
| Fixed rate | 5.95% | 5.95% | 5.69% | 5.69% | 5.65% | |
| margin | 1.41% | 1.41% | 1.15% | 1.15% | 1.11% | |
| 27-Sep-19 | Swap | 0.94% | 0.94% | 0.94% | 0.94% | 0.94% |
| Fixed rate | 3.99% | 3.89% | 3.99% | 3.99% | 3.99% | |
| margin | 3.06% | 2.96% | 3.06% | 3.06% | 3.06% |
Overall, the main takeaways are that:
- borrowers are being insulated from even faster rate rises because banks are currently working with unusually compressed margins-to-swap.
- borrowers probably shouldn't expect these compressed margins to stay. Banks are not charities and they will collectively need to earn what they see is their historic return on equity.
At the end of this article is our unique mortgage calculator, one you can use to compare two scenarios.
One final thought: the one year swap rate is now back equaling its rate in December 2008. When it was last at this level, the one year fixed mortgage rate was 6.89%.
And the two year swap rate is now back to the level it was last in May 2010. Back then the two year fixed mortgage interest rate was 7.30%.
You would be brave to think that current fixed mortgage rates won't go back to those levels again. Perhaps quite soon. But guessing isn't a good idea. Locking in something you can afford is a much better idea. Don't let a bad financial situation fester. Get professional assistance if you need it. And that may include talking to your lender if you have financial stress you are having difficulty managing.
Daily swap rates
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Fixed mortgage rates
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