The 100 basis points risk

Are we about to go back to the future fast with as much as a sudden 100 basis points rise in fixed mortgage rate offers? The wholesale cost of money suggests that is a live possibility

Personal Finance

Are we about to go back to the future fast with as much as a sudden 100 basis points rise in fixed mortgage rate offers? The wholesale cost of money suggests that is a live possibility

15th Sep 21, 6:51pm by David Chaston

The two year swap rate rose to 1.40% on Wednesday, its highest level since June 2019.

That is a rise of +11 basis points since the start of September, and +36 bps since the start of August.

This key benchmark is on the rise even though long term wholesales rates are falling recently.

And that is because financial markets are convinced the Reserve Bank (RBNZ) will raise the Official Cash Rate (OCR) on October 6 at its next review.

How much it might rise then is up for debate. It may well be just +25 bps, but a number of analysts think +50 bps is a live option too.

Their reasoning is relatively easy to follow: employment levels are high with wages rising. And prices are rising and likely to increase faster, meaning inflation is high. Both are the key mandates the Minister of Finance has given the RBNZ: jobs and prices, and both are under pressure on the up side.

But here is the kicker. mortgage rates are now lower than they were the last time the wholesale swap rate was at 1.40%, and by about 100 60 bps. So you might think that banks would press ahead to the 'old normal' for a two year fixed rate mortgage offer.

This is the key comparison.

2 year Fixed, below 80% LVR	2 yrs	diff	2 yrs
when the 2 year swap rate was last at 1.40%	%	bps	%
	10-Jun-19		15-Sep-21
ANZ	3.95	-100	2.95
	3.89	-104	2.95
	3.95	-100	2.95
	3.99	-110	2.89
	3.95	-100	2.95

Bank of China	4.89	-210	2.79
China Construction Bank	3.65	-80	2.85
Co-operative Bank	3.99	-104	2.95
HSBC	3.79	-100	2.79
ICBC	3.95	-120	2.75
	3.99	-90	2.89
	3.89	-100	2.89

This is only the situation if you think the next RBNZ rate change is already fully priced in. Depending on the commentary the regulator offers with its review, more hikes may get priced in and the difference will then shrink really fast as current rates get yet another boost as the 2 year swap rate rises above 1.40%.

One useful way to make sense of these changed home loan rates is to use our full-function mortgage calculators.(Our mortgage calculators are temporarily down, but will be back soon.)

And if you already have a fixed term mortgage that is not up for renewal at this time, our break fee calculator may help you assess your options. Break fees should be minimal in a rising market however.

Fixed mortgage rates

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Source: interest.co.nz

Source:

Daily swap rates

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Source: NZFMA

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5 Comments

by mikekirk29 | 15th Sep 21, 7:41pm 1631691714

China land sale and credit crunch is real reason

https://www.zerohedge.com/markets/chinas-economy-suddenly-disintegrates…

by chebbo | 15th Sep 21, 8:37pm 1631695023

Interesting idea for comparison David, thanks. Certainly paints a picture. I wonder how much difference things like the FLP make, which weren't around in 2019.

by HouseMouse | 15th Sep 21, 8:55pm 1631696148

I don't think, at all, that the OCR will be raised on 6 October. The RBNZ plays politics as much as any political party, and it won't want to be seen as not supporting the covid response, with Auckland likely to be only just down to Level 2 by 6 October.

They might raise it 25 or 50 BPs at the meeting after that. Provided we don't go in to another lockdown...

by Carlos67 | 16th Sep 21, 3:32am 1631719927

Actually the 6th October timing could be just perfect. I expect Auckland to drop to level 3 pretty much exactly then or maybe a week before at best.. They used the sudden Level 4 as a reason not to increase it so they are running out of excuses if there is clear light at the end of the lockdown tunnel by the 6th October. RBNZ decision will be irrelevant anyway if the banks decide to move without him.

by fortunr | 17th Sep 21, 9:33am 1631828005

I think that an OCR raise in October is a 100% certain thing. The only question is whether the RBNZ will raise by 25 or 50 basis points in October. I think that a 50 points raise is a good possibility indeed.

The 1-year and 2-year swap rates clearly point towards significant rate raises in the short/medium period. I think that a sudden 100 basis points rise in fixed mortgage rate offers is actually on the conservative side - I would not be surprised to see more like a 150 basis points raise.

The Covid excuse is also running out of steam, quickly. There is no excuse left for not normalizing rates now, to a more sane, financially sound and sustainable level. The OCR should go up to 2% by mid next year.