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.
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59 Comments
Id presume as rates rise and bank valuations are pulled down we are going to see a lot of folks excluded from borrowing at the banks best rates, particularly FHBs who bought in the past year or so. That additional margin may well see rates closer to 7%.
Id suggest the speed of the swaps rise and the lagging of increased deposit rates is a factor in the decreased swap fixed to mortgage spread. It will inevitably catch up.
"Banks are not charities, and they will collectively need to earn what they see is their historic return on equity."
Quite right.
And if the market deterioration picks up steam, that equity is going to be tested with a ramping up of Provisioning, for Bad and Doubtful Debts. And who is going to pay for that? The shareholders, I guess. And what does that due to stock prices?
It is a disgrace that the Reserve Bank is still running its FLP programme & subsidising the banks. As a result banks have been earnings excess profits.
Banks access to cheap FLP loans at 3% OCR means inflation with be harder to tame.
Bank margins will definitely increase when FLP ends in December.
On top of that the government is planning to increase its spending at a time when our annual current account deficit (exports - imports) is $27 billion for year ending 30 Jun 22.
NZ is living beyond its means & a hard landing for the economy is looking more probable.
The RBNZ's FLP is a nonsensical joke and an utter disgrace. It must be stopped right now, and the RBNZ must let the interest rates normalization process continue with no further market manipulation. Enough damage has already been done with this ultra-loose monetary policy.
Yes the FLP is probably a major contributor. Related to this there still is very low competition for term deposit funding, possibly a lot of people cashed up from covid payments etc. It would be interesting to see whether margins have actually expanded for retail deposit funding
TD rates still have a long way to go before they're attractive enough to draw much attention. The risk-free rate of return at the moment (via Kiwibonds) is 3.5% for 1 year, while the average 1 year TD rate across banks is 4.1%. Yes, it's 60bps more, but does that compensate for the additional risk at the moment? I wouldn't have thought so. Deposit insurance may change this calculation if it ever sees the light of day.
The FLP on the other hand is a bit of a double-edged sword. Yes, it gives bank access to cheap money, but it also allows them to offload mortgage debt as collateral for FLP funds, in the form of securities which institutional investors would be unlikely to touch except at much higher rates of return, given the risk inherent in our housing market currently. Once the FLP ends, banks will have to borrow at much higher market rates, and they will also lose the ability to offload mortgage debt so cheaply. This will have a fairly substantial impact on rates I would imagine, for both mortgages and term deposits.
It will be extended and the NZD will fall to 50c USD.... Let's import inflation.
Gosh I have seen this a mile off.
Why would the govt STOP making political decisions now? Roll on the first finance minister in history who has no idea what finance is.
Let's be honest here..... Labour sees it all as a gravy train, well sooner or later that isn't going to work. But it won't be their fault now will it
Lock now as 5.75%s will seem to good a deal in hindsight in near future.
In 7s%, not far away as fundamental have to catch up.
Wondering will FLP will have any further impact as is not far away, before it is withdrawn : https://www.rbnz.govt.nz/monetary-policy/monetary-policy-tools/funding-…
You can model mortgage repayments using the excel IPMT, PPMT, and NPER functions. Then you can customise exactly to your scenario. As an example, $500,000 loan outstanding, 5.45% interest rate, fortnightly payment of $1,500.
The principal component of the first fortnightly payment is, PPMT(5.45%/(365/14), 1, NPER(5.45%/(365/14), -1500, 500000), 500000)
The calculation for the second fortnightly payment is the same but you reduce the outstanding amount by the amount of principal paid off.
And then you just reduce the outstanding amount further for any lump sum payments.
Rounding the principal amounts to 2dp I can exactly replicate the amount outstanding at any date for my (BNZ) loan.
The iShares 20 years + Treasury Bond ETF (TLT) in the states is down 40% in response to rising interest rates. Its possible, that if interest rates continue to climb and sustain those higher levels, that this is a leading indicator for what is ahead for property. The TLT gives a more immediate response by discounting the expected cash flows with higher discount rates. No guarantees of course, but could be a leading indicator. The US housing market fell about the same amount as the TLT during the GFC.
TLT $105.70 (▲0.41%) iShares 20 Plus Year Treasury Bond ETF | Google Finance
Agree this is what should be happening. That said it seems that every lever that the RBNZ can pull to protect the everything bubble is being pulled, regardless of whether it represent the financial interests of NZ tax payers pr not. Only a small group of Kiwis leveraged to very high levels.
Let them be run over by their own decisions...
Interesting article but flawed.
You have to take into account that inflation is devaluing debt at a very high rate. If inflation if 7% and nominal interest rates are 7% the real interest rate is 0%. The monetary environment remains hugely stimulatory in most countries for this reason. This might well be why consumers have such immense appetites for debt, they are getting a defacto bailout thanks to inflation.
You have to take into account that inflation is devaluing debt at a very high rate. If inflation if 7% and nominal interest rates are 7% the real interest rate is 0%. The monetary environment remains hugely stimulatory in most countries for this reason. This might well be why consumers have such immense appetites for debt, they are getting a defacto bailout thanks to inflation.
Sorry but this is a very bad take. Nobody is getting a bailout unless of course their incomes or revenues / profits are increasing at a rate => inflation.
Most hold the view that properties will appreciate over time. In recent years, some houses doubled in value in as little as 3 years. COVID years are likely an aberration, a boost from relief measures.
And as a decade of low or no interest fades away, and mega interest rate hikes in quick succession are the norm, house asset deflation is in progress.
Economists turned salesmen, are promoting investments in houses. TA thinks that house prices will stabilise and appreciate 5% p.a. Another has advice on strategies to invest. A bank economist says "interest may have peaked", just a few weeks ago.
All I know is that these are chaotic times.
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