Kiwi mortgage holders are collectively set to get about $2.2 billion more in the pockets in coming months due to falling interest rates. This is according to BNZ chief economist Mike Jones.
In his latest Eco-Pulse publication, Jones said the majority of positive cash flow from falling mortgage rates is yet to filter through, "but will do so over the coming six-12 months".
"Carded one-year fixed mortgage rates are now about 2.4 percentage points below the peak but the average rate being paid by borrowers (as at February) is only 0.2 percentage points below the peak. Our estimates have this average paid rate falling to around 5.6% in six months’ time, as borrowers re-fix on to lower rates," Jones said.
"That’s a cash flow of roughly $2.2 billion going back into mortgage-holders’ pockets."
Jones concedes that "a good chunk of the extra cash" may well go on paying the bills.
"But it should at least steady the unsteady recovery in retail spending seen since August. Elevated costs and a still-weak labour market will keep working in the other direction."
BNZ economists currently see three further 25 basis-point cuts to the Reserve Bank’s Official Cash Rate (OCR), taking it to a low point of 2.75% by August.
"Should these cuts transpire, short-term mortgage rates have a little further to fall," Jones said.
"Our best guess is still that six-month and 1-year fixed mortgage rates dip into a 4.7-5.0% range over the remainder of the year. There’s less downside on longer-terms (two years plus) with the bulk of the downtrend in those rates likely behind us."
He said that based on such thinking, "the economics of floating, or fixing for very short-terms", still looks stretched.
Jones said he hadn't changed his recent view when he expressed caution on 'going short'.
"Borrowers have started to dip their toes into longer fixed terms with, for example, the share of lending at two-year fixed terms in February the highest in a year. Floating nevertheless remains a popular choice as some opt to pay the higher associated upfront costs on hopes term rates fall a little further in coming months."
Jones said that’s not unreasonable as there is potential for some rates to fall a little further given the risks to the outlook.
"However, this potential opportunity needs to be balanced against the cost of waiting to term out debt."
For example, he said, there’s currently a 1.7 percentage point difference between carded floating mortgage rates and the 4.99% 2-year fixed rate.
"On a hypothetical $200k tranche of borrowing that equates to a $283/month relative cost to float. Expressed another way, at current rates, the two-year fixed rate needs to fall 0.07 percentage points per month for the borrower to ‘break-even’ on the extra cost of remaining floating.
"A four month wait on floating rates would thus entail an upfront cost relative to fixing for two-years of just over $900 (assuming no change in 2-year rates and making some allowance for forecast cuts in OCR/floating rates), or a required fall in the two-year rate to about 4.75% over those four months to break-even.
"For some that will be a risk worth taking but we suspect many will opt to take the additional certainty and upfront cash flow benefits of longer-term fixed rates. Getting the mortgage strategy 'right' of course ultimately depends on individual borrower’s financial needs and requirements for certainty," Jones said.
"It also bears repeating that all of the above is subject to significant uncertainty given the unpredictable offshore picture. Things are changing rapidly so take all views and forecasts with a grain of salt!"
6 Comments
They keep banging on about not waiting on floating for better fixed. But anyone with half a brain is deploying the same strategy using 6mth and 1 year fixed rates.
That's because he's trying to get the banks hands on that $2.2b!!
On the contrary, it is in the banks best interest for people to pay their mortgage back slowly so the bank gains more profits from interest. Hence why many will penalise mortgage holders for paying bulk amounts off in one go as it impacts the banks' bottom line.
I wonder though what the refinancing rate works out for customers with lower mortgages.
They got their hands on around 1.5 billion last year in any case...it would be interesting to know how much of their mortgage book they 'recommended' was discharged by the holders, and what loses they carried (those selling, not the banks).
A fall of 0.4% on $374bn of mortgages saves about $15bn per yesr in interest payments ($125m per month).
The latest data (end March) has interest paid on mortgages at 6% x $374bn = $22.4bn per year. The economy turned towards custard in May 23 when interest payable was 4.95% x $349bn = $17.3bn.
Thankfully, businesses interest costs are reducing much more quickly , which should bring prices down. That's how reducing inflation works, right?
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