Readers of our swap rate charts will have noticed some sharp changes over the past week, especially since the surprisingly strong Q1-2021 GDP result was published.
This week, one year swap rates rose by +8 bps to their highest since April 2020.
This week, two year swap rates rose by +16 bps to their highest since March 2020.
Given that the rising longer term swap/bond rates have already started to drive rises in longer term fixed mortgage rate offers here already, it seems fair to wonder whether these new rises in short term swap rates will do the same for 1 and 2 year home loan rates.
This is important for many people because 34% of all fixed mortgage rates will come up for rollover within the next six months plus another 37% from six to twelve months hence.
(Much has been made in reports on other news services of higher proportions, but it won't be as high as those because the 'floating rate' portion is unlikely to be in play. Borrowers using revolving credit are far less susceptible to interest rate levels or changes because they are disciplined borrowers using that tool in a clever way and understand the benefits. Other SME or micro borrowers using a floating mortgage to fund the working capital of a business need the same flexibility. And homeowners who have assigned a small portion of their obligations to a floating rate so they can retain the option to make opportunistic paydowns are also unlikely to stray from that benefit. So the floating rate portion is already at its likely minimum level.)
The RBNZ has also projected a 2% OCR within 4 years (see Fig 2.17) and to get there they would need to start raising the 0.25% current level progressively probably starting in early 2022. Bank economists vary in their estimates of when this will start but from Q1-2022 seems likely.
If you have the view mortgage rates will rise from here, is now a good time to think about fixing longer and locking in today's lowish rates?
Certainly in a rising rates market, the issue of break fees isn't on the table. Banks can't really charge much more than an administrative fee if you break a low rate contract to switch into a longer higher rate one. Individual circumstances will affect this perhaps, but that will generally be the case.
A reason you may do this is to lock in longer term rates now (3, 4 or 5 years fixed) on the judgement that shorter term rates may jump quite a lot over the next twelve months before your existing fixed rate contract comes up for renewal. The situation may be that you face higher rates then, if you wait to act.
Presently a two year fixed rate can be had at 2.55% to 2.59% at the major banks. A five year fixed rate can be had at about 3.69%, about +110 bps more.
What are the chances that when you come to roll over your existing loan, either a 2.55% two year rate will still be around, or a 3.69% five rate will still be around?
Swap rates will need to rise by about +100 bps (+1%) to just be 'even'. If you think they will rise by more, you should probably be thinking about a switch.
Current rates are unusually low. Regulators are looking for opportunities to 'normalise' (even if the drug of QE makes that harder). Since the GFC, 'normal' might be more like 5% for a two year rate, more like 6.5% for a five year rate. However, you could easily retort that we aren't going back to the 'old normals', and you might be right. Someone else might point out that markets (and regulators) tend to overshoot, so the risks of future changes are to the upside. In the end it's your call - no one actually knows.,
However, if you are uncomfortable about what lies ahead, you can choose a certainty (for up to five years) at a relatively low rate. Decisions like this tend to be less about the math calculations, more about your tolerance for risk and uncertainty. When you run your personal mortgage though a calculator like this, the additional repayment load might have you choose 'certainty', over risking you will always have a 2.55% rate offer to choose from.
Although it is a few years away, a 2% OCR will likely add at least 1.75% to short term rates (perhaps taking a 2.19% one year rate to close to 4%, others over that and close to 5%). Rates for longer terms are influenced not only by the RBNZ policy settings, but international influencers as well, making them even harder to project.
It is probably a good time to dust off your existing fixed rate mortgage contract and run some numbers. Here is our full-function mortgage calculator that allows you to compare two scenarios. Here is our break fee calculator.
The opportunity of the existing very low mortgage rates may not be around for much longer if markets push short term wholesale rates higher in a concerted way. (And, it still is an 'if', even if it does seem more likely at present.)
Uncertainties on the way down don't really come with potential penalties that can hurt. Uncertainties on the way up do. The one thing going for dealing with them is that break fees will be minor if you decide to make a change.
There is a lot more to a decision like this than the arithmetic, or just reading the economic tea leaves. Best you seek some professional advice from a qualified and registered independent source, who can help you make a proper judgement from your own financial situation.. (This column is not it.)
43 Comments
"Borrowers using revolving credit are far less susceptible to interest rate levels or changes because they are disciplined borrowers using that tool in a clever way and understand the benefits"
Wow, massive assumption re: revolving credit. How would you draw this conclusion based solely off a facility? A revolving credit facility can be extremely dangerous for some. The temptation to redraw is high, limits can be high, it's interest only & and of course on a variable rate. Just because you have the product doesn't mean you're disciplined & clever?
Yes, an assumption certainly. But remember, the propartion of mortgages on floating rates now is under 13% and back to the low levels last seen in 2007/8. (Back then floating rates were touching 10% and two year fixed rates were touching 9.5%.) So the key point is we are now back to historical minimum levels meaning we are at the core users only, very few are on it by mistake or inattention.
Well that's what the banker type me when I took mine out :shrug:
Given the requirements around responsible lending criteria, this would be a very easy thing for banks to pick up - has someone just maxed out their revolving loan or shown deposit and withdrawal behaviours that indicate that are on financial stress.
If you're looking at a timeline of less than 100 years, history in financial markets is questionable given cycles (and the global reserve currency du jour) typically lasting between 80-100y.
https://en.m.wikipedia.org/wiki/Reichsbank#History_until_1933
In March / April 2020 the rules of the game were published by RBNZ. The rules are borrow as much as you can, your asset price will be looked after. Any idiot can see that RBNZ have no intention of rewriting or rebalancing these rules. Interest rates moving up 25bps here or there will make zero difference, the RBNZ and Govt will ensure asset prices stay high.
Cynically, next time round post next election, those gains in those asset classes are ripe pluckings, for taxing. City Councils are working on it right now. In Christchurch recently a financially struggling ratepayer was told by the desk clerk, go get a reverse mortgage. Freudian slip of what is being plotted behind closed doors undoubtedly. Got to get in before the Greens get to have their way.
Well, it makes no sense to go pushing all wealth into assets only to continue blithely insisting that actual productive workers should pay for everything in society. Unless you're an older legislator or central banker with a massive asset portfolio, I guess, rather than someone looking to govern a place effectively.
Gather around the campfire kids, let us oldies tell you about a time when Reserve Banks where the good guys. They stopped the kind of credit bubbles and runaway inflation that we've seen in housing. We called it 'financial stability', it meant a rising quality of living and jobs for everyone in productive industries.
Then they hired some economists who thought that was the wrong way for capitalism to work...
he RBNZ has also projected a 2% OCR within 4 years (see Fig 2.17) and to get there they would need to start raising the 0.25% current level progressively probably starting in early 2022.
Hardly likely unless current US and NZ bank lending preferences change significantly.
If there has been anything more unusual about the past few quarters, the love of safe and liquid assets hasn’t been that thing. Instead, it has been the turning away from loans and lending..
In other words, you won’t see any real inflation (sustained, broad-based consumer price increases) without serious credit expansion. Link
What is your take re: future inflation (say next 2-3 years), Audaxes ? Genuine question, as I consider your posts and opinions of value and interest. I guess your take is that we will not experience sustained, significantly higher inflation ?
Starting towards the end of last year, I have shortened the maturity profile of my bonds allocation, and also reduced my overall exposure to bonds and also shifted it to corporate bonds at the expense of government bonds. I guess your positioning would probably be quite different to mine ?
Just locked in 18mths at 2.35%, and increased payments by $200/week. Decided it was better to smash down the principal while rates are low. Numbers say rates have to rise pretty fast (much faster than I think they will) before those long term rates are going to be cheaper than a series of short term fixes.
I've locked in 3.05% for 4 years. Have been increasing the payments each year since first home buy in 2017, started on 25 year term but now my payments are scheduled for 9 years. Whether I see savings on long term rates doesn't bother me, it's the certainty of having nearly half of the loan duration fixed which gives peace of mind.
A reasonable approach, different motivations and circumstances. On the new schedule we'll have ~15 years to go after buying in Jan last year. I should be getting a $15k+ raise by the end of the year, so that will go towards building another lump sump payment at the next refix. If rates don't rise much we can be less aggressive after the next refix and enjoy a better lifestyle.
The fundamental question here is why increase rates at all? This *might* cool the housing market and consumer spending a bit, but there are smarter ways of doing this without taking more money from mortgagees to give to banks and investors - eg targeted tax increases on new inefficient appliances (with offset grants for low income families). More importantly why do we want to cool the whole economy down at all when we still have hundreds of thousands of people in involuntary unemployment? Surely we want an economy that gives everyone that wants to work a decent job? What smart tools can we use to target growth in the places and sectors that need to expand?
If anyone wants to give me a lecture on the theory behind monetary policy (businesses borrow more to expand when interest rates are low, savers save more when rates are high etc), please provide references to empirical evidence that this is actually how things work in the real world (it isn’t).
I'm with you. We need an economy that is structured to enable one parent working full-time to be able to afford to support their family in a decent, warm home, with good quality food, and strong local services. This is not some utopian dream - it has been achieved for sustained periods in the past in plenty of countries (and technology has come a long way since). The challenge is that getting back to this kind of society requires a significant re-distribution of resources.
Zero sum game. In order for there to be winners in society, there must be losers.
No such thing as 'everyone's a winner'. As long as greed & power exist in this world, there will always be losers on the other end that suffer. This is the unfortunate truth that people don't want to hear. Doesn't matter how much they donate, those that were not born in wealthy/luckier families will always have to work 100x harder just to make an average life.
The Fed have increased the M1 money supply by about 80% in the last couple of years alone. The equivalent of pushing all their chips to the center of the table saying "all in". I agree another crisis is highly likely (although it's really just the endpoint of the original one), but what chips do they have left to play with? From that point the only play left is to pull out the guns and rob the rest of the table to stay in charge of the game
From historical data, this is what I am seeing as well. We have a crisis, interest rates get dumped, we recover and they go up a little bit for 2-3 years, then the banks realise this isnt working and it is all slowing down again, or another crisis happens so they dump it again. Long term on a fiat system rates only go down.
Unless we get a massive hike in inflation, but they will just manipulate the CPI so it stays at "only 2% "
It wont be driven by Orr or Robbo as we are followers of global debt trends. They prefer hyperinflation to protect the banks ahead of the interest of kiwis. If there is a monetary rate event from overseas then we will follow.
There is going to be a reset - the US stock market is close to record PE rations again. This is ratios not supported by earnings so all about speculative gain. Sound familiar...?
Popcorn.
As a property investor it's a bit more complicated. As the tax non-deductibility changes on first of April each year. This amplifies tha savings as the non-deductibility of interest increases. Need to fo some what it analysis to check scenarios to work out total costs including tax.
I agree Interest rates are on the way up unless we go back into lockdown.
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