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It is becoming a 2% world in the home loan sector as markets and regulators actively open up the space to cut rates further, and savers focus on 'safety' rather than 'return' for their nest eggs

It is becoming a 2% world in the home loan sector as markets and regulators actively open up the space to cut rates further, and savers focus on 'safety' rather than 'return' for their nest eggs
Source: Wikimedia Commons, by Vicente Villamón

The RBNZ's May Monetary Policy Statement (MPS) decisions have put in place the conditions for the next round of mortgage rate cuts.

In late trading on Wednesday after the MPS decisions were released, wholesale swap rates fell to new record low levels across the whole rate curve.

The two year swap rate fell -7 basis points to just 0.1075% which is the lowest any wholesale swap rate for any duration has ever been.

The five year dropped -10 bps to 0.215% and the ten year fell -13 bps to its own record low of 0.60%.

It was only 50 days ago that the two year swap rate was at 0.60%. Things have moved fast, and have been pushed sharply lower today. See the charts here.

Bank pricing managers will wait until Thursday's Budget announcements before making further home loan rate shifts, but once that policy position is known, mortgage rates are sure to fall again then. Most popular rates will start below 3% after the next round of changes.

Already many fixed rate 'specials' are before 3% - a surprising number as a quick check of the table below will reveal. But those rates won't stay like that for long.

And it is not only the wholesale rates that will 'allow' the sharp cuts.

Banks will now be eyeing further steep reductions in term deposit offer rates. But those moves won't include much action for at-call savings rates because those are already close to zero.

Today, RBNZ Governor Adrian Orr gave both implicit and explicit cover for banks to offer lower mortgage rates and adjust their term deposit rates as they see fit. There is no evidence yet that savers are moving funds away from bank savings. Most savers are more concerned about 'safety' than they are about 'return' at this time, and those fears give the space to push term deposit offer rates down.

In fact, all the evidence is that term deposit balances are rising, not falling. It will only be when cash balances start to move away from banks will this decline be arrested - and frankly that is not likely even at zero interest rates for savers. The evidence in other western countries is overwhelming on that.

Savers will be paying for mortgage rate reductions. All banks are reporting squeezed net interest margins (NIMs) and with matching term deposit rate cuts, banks show they are serious about protecting margin.

Usually when interest rates fall, asset prices rise, as serviceability sets the constraints about how much a borrower can afford to pay for a house. But will it in this market? Banks will be looking only for high quality credit risks and two key elements will be substantial equity and reliable earnings. That will work against many first home buyers thinking now will be an 'affordable' time to buy a house. Without strong financials, borrowers won't be offered the low mortgage 'specials' and will suffer the penalty of tough 'low equity premiums'. Housing demand as we knew it could well be very different this time making it just a buyers market for the well-to-do.

Here is the full snapshot of the advertised lowest fixed-term rates on offer from the key retail banks at this time.

Fixed, below 80% LVR 6 mths  1 yr  18 mth  2 yrs   3 yrs  4 yrs  5 yrs 
as at May 13, 2020 % % % % % % %
               
ANZ 3.65 2.99 3.20 3.25 3.99 4.75 4.85
ASB 3.89 3.05 3.25 2.99 3.69 3.79 3.89
4.79 3.09 3.05 3.35 3.69 3.79 3.89
Kiwibank 4.29 2.99   3.39 3.65 3.99 4.09
Westpac 4.79 3.05 4.25 2.99 3.39 3.49 3.59
               
Bank of China 3.89 2.79 2.89 2.89 3.19 3.79 3.89
China Construction Bank 4.70 2.80   2.85 3.19 3.30 3.45
Co-operative Bank 3.09 3.09 3.35 3.35 3.69 3.79 3.89
Heartland Bank   2.89   2.97 3.39    
HSBC 3.64 2.95 2.95 3.09 3.50 3.60 3.70
ICBC 4.29 3.18 3.18 3.18 3.20 3.99 3.99
SBS Bank 3.89 3.09 3.39 3.39 3.69 3.79 3.89
  3.89 2.89 3.35 3.35 3.69 3.79 3.89

In addition to the above table, BNZ has a unique fixed seven year rate of 5.20%.

Fixed mortgage rates

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64 Comments

Surely interest rate are becoming less relevant as unemployment and wage cuts come to the fore?

Also drop from already such low rates - Law of diminishing return applies and even reserve bank governors is aware

' The current goal of monetary policy tools is to reduce borrowing rates for New Zealanders, and further OCR reductions at this stage would not be effective in achieving that. Consequently, the Committee reaffirmed its forward guidance that the OCR will remain at 0.25 percent until early 2021.'

Crazy as it sounds, its looks safer now to take on debt than leaving savings in the banks.

Orr is pushing down mortgage interest to help home owners and reduce risk of default. This recession will be bad enough without family's losing their homes. It's not about propping up the property ponzi right now. It's just about alleviating stress on the existing debtors. There's currently around 164% household debt to income in NZ and that is BEFORE all the reduced incomes and job losses start showing up in the data. That ratio is only going to get worse in the short term.

The lower mortgage rates are unlikely to be setting fire to the market any time soon. How could it be? It's all epic tail winds from here.

Got to keep that Ponzi scheme going. Are the banks not even a tiny bit worried that NZ Savers are actively looking for safe havens? Because really we're all worried about baking collapse and the fact that NZ still does not have any form of Savers Deposit Protection Guarantee in place and won't for long while if ever!

There are overseas banking services that would be more than happy to protect our money for us you know!

Interest rates are lower overseas , and always have been .

Yep. Hard to justify the almost 1% spread between NZ banks and their Australian parent banks. Shudder to think to what extend we are underwriting competition in their market - money that just disappears forever, no GST is collected on it and it just vanishes out of our economy.

The OCR needs to be taken into negative sooner than RBNZ is thinking. Banks are not prepared but the economy needs a big jump start. I hope the RBNZ does not wait for pulse to flatline before taking drastic action. We need this asap before more job losses and a domino we cant stop.

low interest rates are scaring the chickens. Something is wrong and they are not telling us what.

My guess - even with all the money being thrown at the current economic crisis they are scared it won't work.......the shit will still hit the fan.

14
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The economy was already going down the toilet before this hit. If interest rates were still up at 8% then cuts would have some effect but cuts from 3% will have no effect when unemployment is suddenly 25% and everyone else still working took a 20% pay cut its game over. Its time for a few more people to step up and be honest the emperor has no clothes on.

How do they manage this though? They told us not to worry and supermarkets would be fine and toilet paper started flying out the door.

Do the numbers Carlo....a reduction in interest costs from 3 to 2% represents a one third saving.

Just what that will do to the asset prices is another story, as up until now purchasers havent been factoring sufficient risk to future expected returns. Some repricing going on as we speak, and its downwards.

Dont be fooled by the sharemarket, which is dominated by useless fund managers and brokers clipping the ticket of their poor customers; as they can.

It doesn't quite work like that.

For a $1M mortgage 3% is $972 a week. 2% is $853 a week. A difference of $119 a week which is immaterial on a weekly basis when you're paying off $1M.

Indeed. if rates go up it's not far to double the payment either.

Using your figures it is a 12% reduction in mortgage payments - when you calculate the amount of new excess discretionary income that means when you add it up for every mortgage holder in NZ - you are talking about a massive stimulus for the economy.

And thats using your conservative 1% interest rate reduction - in reality many are coming off ~4% rates and are going to be looking closer to 2.5% - which means the stimulus is going to be even bigger.

Carlos - We are not going to end up with 25% unemployment or everyone taking a 20% pay cut. Out of everyone I know only a AirNZ pilot is getting a cut but even that is temp. Once again as humans we are thinking very worse case scenario lets just see how the numbers unfold.
My income has risen over the lockdown so it's a mixed bag but I see NZ bouncing back well over the next 12 months.
We really don't need half of all the cafe's or bars we had, hopefully alot of those workers can be re-deployed into a more productive industry.
Remember there has been a real shortage of workers in every industry particularly the primary one's.
The 200,000 or so temp work visa's workers that filled alot of barrista/bar person positions will go home.

Well said - our unemployment isn’t likely to breach 12%, and might not even get over 10% given the measures taken in todays budget (there will be a LOT of temporary jobs created by SOEs in todays budget swelling the public sector workforce considerably)

Totally agree with cancelling the temp work visa's asap Shoreman, no excuses now for not being able to find a local to do the job. I'm not as optimistic as you though on potential unemployment impacts. International Tourism was a big export earner and employer for NZ, bigger even than dairy. Restaurants, cafe's and bars as you mention are also getting hammered. The outlook for commercial property is now really poor, etc. There really isn't much upside outside access to cheaper debt, when many of us are already overloaded with debt and incomes are looking shaky. TIME magazine are now referring to what's unfolding as the "First Global Economic Depression of Our Lifetimes: https://time.com/5837442/first-global-depression-our-lifetimes/
The BBC are also now reporting one in four US workers are claiming jobless benefits, with 36M new jobless claims in the US since mid-March:
https://www.bbc.com/news/business-52664929

That doesn't sound very good does it?

The issue being a negative OCR does not give economies jump starts. Hard to make a case for it.

15
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if you haven't got a job, you ain't paying the mortgage

Not necessarily - most mortgages are in two income households, and while there will be 100,000+ extra unemployed, the odds of two people in a double income household being laid off is quite small, and with the average mortgage size in NZ sitting at around $225k, even a household with 2 x unemployed may still be able to pay their mortgages given the benefit bumps if they are on the lower side of that average (a $225k mortgage is cheaper than renting pretty much everywhere).

10
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As I said earlier in the week

WHATEVER YOU DO ........... DONT FIX YET

perhaps depositors can sleep tonight safely in the knowledge, there's going to some great buying.

Yep. I saw you commenting this. You have definitely called it.

Good advice Boatman. I read your warning earlier in the week. Looking spot on so far. I'm holding off from fixing for now.

Or buy.

Spot on.
"Banks will be looking only for high quality credit risks and two key elements will be substantial equity and reliable earnings. That will work against many first home buyers thinking now will be an 'affordable' time to buy a house."
(my deletion of who will be penalised. It's likely to be ALL potential buyer, until such time as the maths gives lenders the security buffer they need. And that comes with....a lower prices for the asset in the first place; much lower).
This is EXACTLY why Kiwis should have been borrowing for a couple of years already; when they could, and the asset they were securing the loan with had a higher value to give them more funds. But not to spend that new debt then, but put it aside in an Offset Account to spend in the future. Now, the amount they'll be able to acess will be much less - if they can get it at all.

I am a potential FHB. My wife and I are waiting to see what happens. We both have secure jobs (education/healthcare) but I am un sure how our deposit is going to work for us in this market?
We have 12%. I am not sure if the banks will see us as too risky or will only be willing to lend a small amount under the current climate?

The removal of LVR restrictions by the RBNZ should actually work in your favor. Appetite from banks for >80% LVR loans has increased with the main factor being serviceability ("no tyre kickers please"). Your secure jobs are a real plus in this regard. Remember that as your deposit is <20% you'll pay interest at 'standard rates' not the carded specials (e.g. you don't qualify for the 2.99% 2yr special). Standard rates are usually around 0.75% higher than specials. If you can realistically get your deposit to 20% within say a year or so by saving more then I'd recommend doing that. House price declines will help your deposit become 20% even quicker. Moral of the story is you're actually more attractive to banks now then you were before but your hand could be even stronger in the future if you show patience and play it right.

Solid advice ^

You're in a good spot, ideally placed tbh. If you can afford to, see what the next three months brings. Many who are highly leveraged will panic or some will decide to lock in whatever gains they have now and offload their houses. The banks may be reluctant to go below 20% (they usually need a poke) but they may also find that FHBs become a huge portion of new lending and end up having to play the game.

If your repayments are likely to be similar to whatever you're currently paying as rent and under 40% of your net income, I'd say you have a pretty good shot when you do jump in, but don't feel any real pressure to do so right away. Keep saving, think about turning part of your Kiwisaver into a cash holding if you're worried about stock market movement while you wait, and see how the market reacts once the earnings and employment pictures normalise a bit, whatever they end up normalising to.

You are the lucky ones. My advice is to get out there, find a house you like and make a crazy low offer ie 20% less than what it is worth. Then if that doesn't work move on to the next one. But don't be surprised if a week later the first one is contacting you. "oh can you please buy this one."

The Ronovation Special Offer tactic.

Whatever you do, don't take this lower interest rate as a piece of positive news!

Could you elaborate?

If you need me to elaborate, then I think one of us is in the wrong website.

Chairman, great time to be buying with low interest rates and affordability!
Where do you reckon I suggest to buy?

Wanganui +32% pa growth and cheap properties. Maybe Gisborne +24%pa +7% over last 3 months

Average current value $ 12 month change % 3 month change %
Buller 214,118 13.70% 3.00%
Grey 230,539 5.80% 1.60%
Waitomo 247,357 8.30% 1.10%
Ruapehu 249,931 16.20% 0.40%
Westland 268,385 4.80% 0.00%
Clutha 269,093 16.30% -0.30%
Tararua 273,137 18.30% 4.80%
Gore 279,637 20.30% 6.70%
South Taranaki 285,669 19.00% 7.80%
Rangitikei 285,676 24.20% 3.10%
Waimate 290,279 18.20% 0.50%
Kawerau 291,068 16.00% -2.00%
South Waikato 306,858 19.50% 12.50%
Stratford 330,575 19.00% 4.70%
Invercargill 354,981 20.60% 8.60%
Southland 355,173 13.00% 2.50%
Waitaki 361,503 12.60% 5.80%
Whanganui 367,740 32.80% 8.50%
Ashburton 373,000 5.20% 2.00%
Opotiki 375,170 17.00% 8.60%
Timaru 386,717 3.90% 0.70%
Christchurch - East 392,071 4.10% 1.00%
Central Hawkes Bay 402,404 3.30% 0.70%
Hurunui 409,572 4.90% 0.80%
Masterton 426,634 12.00% 4.00%
Gisborne 434,701 23.60% 6.80%

Just watch out for snap reversals of those growth numbers. Whanganui, home of exactly what booming recession proof industries???

PPE production, health, teachers, food production etc & benefit recipients are fairly recession proof one would think under Labour government.

Apart from benefit recipients, which of those categories are strongly represented in Whanganui, compared to any other town of similar population?

Oh dear

Bugger off! Parasitic landlords are not welcome in any of those places! They just bleed the renters of money they don't have and expect a Government subsidy! The Government needs to put rent, and condition controls and licencing of landlords in place to stop the wholesale raping of far too many of the population, especially the younger generations!

The Man, gotta watch those rental yields. I dont know much about some of the areas suggested by others but if you cant get a good tenant then the growth %s are out the door. You will need to foot monthly payments fully and this is when investors get into trouble. The good times of banks topping up loans when payments are missed and capitalised interest are gone. Any property investment, borrower needs to have ability to service with zero income now (worse case scenario). My suggestion fully research your market location, rental returns, etc before investing.

Rental yields are good in many places in Nz.
You should be able to get a return of double what the current interest rate you are paying .
Providing you do your tenant checks thoroughly and you have a decent property then it is not a problem.
Yes there are going to be people that lose jobs in the future but we personally haven’t got any tenants behind as yet, not to say it won’t happen.
My recommendation to buy would be ChCh that has the most stable market in NZ

THE MAN 2, for your money you can't go pass Phillipstown and Linwood East. You can stick 8-10 people (mostly skinheads) in a 3 bedroom house for really high rental yield and all paid by NZ Government. What can go wrong?

Until hyper inflation comes... ha ha

I don't see much risk of that for a few years. Simple analogy for you. A recession is a massive hole, a big empty space where money and GDP disappeared, businesses failing, unemployment. The recession hole is always deeper if you enter the recession with high debt.
QE tries to fill the hole.That's not inflationary until it fills the hole beyond the empty space of missing GDP and money that was wiped in the recession.

The S&P500 was at 3370 in Feb it's now at 2820. That's not inflation. It's gone up from the 2237 drop late March but all the printing has not filled the hole yet. And let's face it, when the true extent of the recession starts to become apparent the stock markets will freak and crash again. 2237 probably won't be the bottom for this recession.

The hyper inflation comes in if the QE is overdone and often in an environment complicated by currency and foreign debt problems (NZ is nowhere near there yet because everyone is similarly deflating their currencies).

A lot of economists thought the GFC QE was overdone eventually, specially in Europe but eventually we did see predictable asset price inflation, but unfortunately little to no income growth. Now here we are again. A much worse recession this time and we are only at the very beginning. We have a lot farther to fall, a lot more is going to be wiped out and I would guess we are years away from any risk of inflation of any kind, let alone hyper inflation. The whole system may even crap out and need to be reset this time (ala Ray Dalio's theory).

It may happen of course, because Central Banks are {insertideologybasedinsulthere}. But there is no point freaking out about inflation or hyper inflation just yet. Prepare for short to medium term deflation but remaining aware that the debt monetisation will potentially inflate assets down the line if the central banks overshoot again, because growth is MIA.

One thing noone is talking about is tax. High earners all know what's coming, which is a new top tax rate with a 100k or 150k threshold. And that's the bare minimum.

This has a significant impact on serviceability as mortgage interest is not tax deductible. It will firstly affect the higher end properties but will eventually reverberate through the whole market.

As Michael Reddell said yesterday, a 4th high income tax threshold will only raise $2b, compared with the $80b+ raised by other tax brackets. It would only cover something like a 0.5% cut in the lowest tax rate. Small beer...

Logically that makes sense. But the increase in the top tax rate to 39 percent in April 2000 coincides with (/kickstarted) NZ's biggest percentage price increase housing boom of the last 30 years.

Sounds like nonsense - the deficits are going to be necessarily massive over the next 2 years, and tax increases like that would be meaningless in closing the budget gap. If Labour gets a 2nd term without needing NZ First, then likely might see something different tax wise, but nothing will happen this year guaranteed.

Tend to agree. Raising taxes just before an election? Don't think they're that dumb.

Property investor here and I focus only on cash flow. Investors who manage their finances well are going to kill it in this market, just like every crash, particularly established players with a strong track record and good income.

Unless you are a cash buyer, otherwise I totally disagree with you, as banks going to apply stringent lending requirements to investors in coming months. As you can see Mr Chaston’s morning briefing about the uncertainty prevailing in Aussie, and a link to CBA bank the biggest lender in Australia. Same model applies here too.
https://www.smh.com.au/business/banking-and-finance/house-prices-could-f...

Australia is a bit different in their supply / demand equation. There is a LOT of stock about to arrive over the ditch. The banks may have to pull back here to cover that, which is a concern.

I have about 45% debt of a few mil in assets with high returns. Not every investor is leveraged to the eyeballs like many comments here suggest. The serviceability tests in place make that virtually impossible on a portfolio of any size.

Ah and therein lies the rub. The serviceability was predicated on pre-pandemic rents and income. Adding to that is that the nominal debt size will remain the same while the assets may not retain their value (depending on what they are obvs). There will be many investors who looked pretty healthy before the pandemic, who appear to have high LTV and a nice rental yield. But if there is downward pressure on rents and the investor also loses their income? What seemed like moderate debt, might sudden become high debt.

You probably won't like this view but I think anyone who buys a 2nd, 3rd, 4th property must pay the LVR requirement with cash and not use equity in existing properties for the purchase. Otherwise we end up with ponzi housing markets like NZ and Aus.

Assume you'd be able to save up deposits for additional houses without using equity in other homes?

Thanks for that, needed a laugh.

Serviceability testing effectively does that. I can't go out and leverage up into a lot of property with bad cash flow even if I wanted to.

It's not even clear what such a thing would mean with the prevalence of offset mortgage accounts.

RBNZ throwing the kitchen sink at protecting the c$1,000B of increased 'value' in the NZ housing market since 2000, c$600B of which was added since the GFC! (Assume there are similar rural property numbers out there.) During the same period GDP per capita increased by only c30%. What could possibly go wrong?

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