Is this as good as it gets when it comes to mortgage rates? Some observers think so as streams of borrowers consider breaking their fixed term loan contracts

Is this as good as it gets when it comes to mortgage rates? Some observers think so as streams of borrowers consider breaking their fixed term loan contracts

How low can they go?

Mortgage rates are at record lows, and it seems as soon as we think they can’t go down any further; they’re cut again.

BNZ tapped into new territory this week, dropping its carded 2-year fixed rate to 4.39%, just 4 basis points above the lowest 1-year fixed rate.

Westpac has since followed, cutting its 2-year fixed rate to 4.49%

The average 2-year fixed rate across New Zealand banks is now at 4.91% – down from 6.13% a year ago. The floating rate is at 6.04% – down from 6.72% a year ago.

But experts say those holding their breath for further cuts risk end up running out of oxygen. In other words, they reckon this may be as good as it gets.

Mortgage rate cuts unlikely to follow another OCR cut

Addressing the impact of monetary policy first, the chief executive of the Cooperative Bank, Bruce McLachlan, believes we won’t see banks cut rates if the Reserve Bank (RBNZ) cuts the Official Cash Rate (OCR) again this year.

While we have seen banks announce cuts to their rates immediately after, if not before, the RBNZ has made its three 25 basis point cuts this year, McLachlan says it’ll be a different story if the OCR was further cut from where it is now at 2.75%.

With the market assuming a further cut this year, this has already been priced in, he suggests.

However, if the RBNZ makes two or three more cuts to the OCR, McLachlan believes we may see rates drop further.

“Do you believe the RBNZ, or do you believe some of the other economists who believe inflation’s down for longer?” questions McLachlan.

He maintains there’ll only be one more cut, as the economy isn’t in such a bad state that it requires more.

Banks can’t cut more and remain competitive

Competition between banks in the mortgage market may be rife, but McLachlan doesn’t think there’s enough fuel in the tank for banks to outdo BNZ’s latest cut.

“I doubt that any bank can attain an appropriate return on capital at those current relativities between deposit and mortgage rates.

“I don’t think there’s any further room for competitive side margins to go any lower for a sustainable business. That doesn't mean people won’t take it lower. The competitive pressure has reached as far as it should go, so all round I don’t think there’s any further downside in rates from these levels.

“How can anyone have a concern fixing in the mid 4%s. That’s the lowest it’s been in my lifetime. You’re not losing.”

Deposit rates can’t go lower

Squirrel Mortgages managing director, John Bolton, says it’s important not to fixate on the OCR in the discussion, as while changes to the OCR impact 6-month and 1-year fixed mortgage rates, longer term rates don’t respond that directly to minor OCR movements.

He expands on McLachlan’s comments on banks’ profitability – ie the spreads between their lending and deposit and wholesale borrowing rates – saying banks can’t drop their savings rates anymore if they want to attract depositors.

He points out the OCR is close to the lows it was at during the Global Financial Crisis, yet credit spreads have contracted hugely since then.

In other words, depositors are no longer getting higher returns for higher risk investments. The differences have been smoothed out, but what depositors get is still really low across the board.

“There’s almost like a natural floor in terms of how low they can lower the deposit rate,” says Bolton.

Furthermore, he points out “Overseas money is already incredibly cheap and can’t get cheaper. How much less than zero can you go?”

Rumours that mortgage rates would drop below 4% haven’t eventuated

“I don’t see a lot of things out there that would point to borrowing costs getting much lower than they are at the moment. I really do think they’ve bottomed out. That doesn’t mean they couldn’t go down a smidgen more,” Bolton says.

He says there were rumours floating around last week a smaller bank was gunning for a headline-grabbing cut below 4%, but that hasn’t eventuated.

He maintains if any bank was to cut rates further, it would be a smaller bank, prepared to trade off profitability.

Go2Guys mortgage adviser Campbell Hastie agrees there’s been a bit of talk about mortgages rates being dropping to the high 3%s, but doesn’t believe they’ll get there.

He notes only a small number of borrowers are being enticed enough by the low rates that they’re locking themselves into 5 or even 10-year fixed term contracts.

Hastie says a number of people are locking a portion of their mortgages into fixed shorter term rates, and floating the other portion in the hope of nabbing a lower fixed rate in the near future.

Suffering from “post-fixing dissonance?” To break or not to break?

Hastie, Bolton and McLachlan say low interest rates have prompted an influx of borrowers to consider breaking their fixed-term contracts, to capitalise on the cheaper rates on offer.

McLachlan says this has been happening for the last six months, but has really escalated within the last month.

Hastie and Bolton say a number of their clients have inquired about breaking, but most have realised it’s unlikely they’d be better off by the time they paid the break fee.

Hastie says breaking because a bank isn’t giving you the interest rate you’d like, isn’t usually a worthwhile enough reason.

“For some people, the benefit is so small, they’re actually better to not drink that daily flat white. It’s a $5 a day difference,” he says.

“Break fees are there for a reason and it’s not just to cover costs. It’s a retention policy.”

Bolton says he has a number of clients who fixed at mortgage rates in the mid-5%s and are now suffering from “post-fixing dissonance”.

He adds that further to paying break fees that tend to equate to the interest saved, all of the cash contributions come with a clawback, so if you refinance with another bank within a certain period of getting the cash back, your bank can reclaim the cashback.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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34 Comments

Where are the experts with differing views? Of course bankers and mortgage brokers are going to say rates have hit rock bottom. They don't want them to go lower as it impacts on their profits. Ask Japan how low mortgage rates can go (10 years fixed at 1.20%). Or Switzerland (2 years 1.03%).

Sub 4% rates are coming.

You are not correct: there is no correlation between bank profits and the absolute level of interest rates. Banks make their profits from the margin between costs (swaps plus risk premiums) and the rates they agree with customers. This story helps explain how it works.

It is a myth that banks want high rates to get high profits. What they want is high margins no matter what the rate is. Whether they get it or not is battled out in the competitive market place between them, their funders (often savers) and loan customers. (Japanese and Swiss banks are plenty profitable.)

So why are the rates so low in Japan and Switzerland?

And why can't those same conditions occur in NZ to give sub 4% rates (or even sub 2% as in those countries)?

Any bank would go broke very quickly if it tried that, unhedged. The FX markets move way more than the 'interest rate savings" - in fact they could wipe out a 3% per annum margin in a few hours. Suddenly the receivers of your bank would use the fine print in their mortgage document and expect to be paid back immediately.

Banks hedge offshore borrowing into NZ dollars and that essentially raises their costs to local interest rate levels. The advantage for them is access to funds, not the rate.

Besides, no offshore bank would ever lend to you in Swiss francs, say, and you give them security in a NZ dollar asset. Banks are way more prudent than that.

I believe that you meant to reply to the comment below as opposed to this one.

For Japan my understanding is all their borrowings are off Japanese, ie they borrow very little from abroad, unlike us. However the expectation is that the Japanese OAPs will sell down their bonds to live on it will force japan's govn to borrow more and more from overseas. That is a/the theory anyway...

Mrs Watanabe is forever lending unhedged Yen into the foreign issued NZD Uridashi (PDF page 22 of 62) market to gain a yield pickup that will hopefully offset hiccups such as this.

Picking up pennies in front of steamrollers. Eventually you get squashed when you get inevitably distracted. Which is why Mrs Watanabe and gambers do it, but not the professionals.

The professionals underwrite the deal and on sell it to retail at a yield markdown - YEN and USD carry trades of this magnitude (NZD/YEN 60 billion in 2008) are mirrored daily the world over, in much greater size. Dim Sums being the latest incarnation. Greater fools are never in short supply and they are not playing for pennies. Read more

Because as a nation we do not save enough and we have to borrow money from overseas.

Then why is it so expensive to get the saved money from those countries into the NZ mortgage market? e.g. Why lend to Swiss borrowers for 1% when you could lend to NZ borrowers for 4%?

Surely there isn't a 3% cost shifting money from Switzerland to NZ?

All NZ bank foreign borrowing is hedged via cross currency basis swaps and the liquidity premium (basis) is usually positive against the NZ payer. Thus these costs and others are added to the credit premium a local NZ bank pays to raise foreign funding via it's offshore sub.

The RBNZ estimates these costs in a recent financial stability report PDF page 23 of 62.

Isn't the OCR the rate banks can borrow cash from the RBNZ?

So if the OCR is 0% what would the bank's margin be and what would mortgage rates then be?

The OCR drives the floating rate. Fixed rates are driven by the swap rates.

I'm in the process of breaking from a 5.3% interest rate with ASB and refinancing with ANZ at 4.49% fixed for 2 years (on my mortgage of $250,000). ASB's break cost is about $2600 and the solicitor's costs are about $600 or $700, therefore I calculate that I would just about break even by refinancing with another bank - however the cashback offered makes it worthwhile.

Presumably the cashback you mention is from ANZ and will be reclaimed by ANZ if you break your fixed mortgage with them before the term expires? 

ASB changed their break fee calculation earlier this year. Make sure your account manager has made the calculation using the appropriate formula that is in your loan documents.

The difference between their new formula and the old (very cheap to break) formula from the Credit Contracts and Consumer Finance Regulations is huge.

I must have broken all of my loans at least 10 times over the past 7 years (since rates were falling). The old formula almost never created a break fee if you knew what you were doing! Which is probably why they have changed it!

Rates go down, prices of homes go up..there is no real savings for the buyer. It is all a mirage. And one day, the rates will catch up and then it is cry babies all around ?

ANZ just emailed me an offer cold today. I am not a customer.
Flexible Loan (overdraft) 5.60%
Fixed 6 months 4.59%
Fixed 1 year 4.39%
Fixed 18 months 4.49%
Fixed 2 years 4.39%
Fixed 3 years 4.65%
However I see on DCs note for todays happenings that Westpac has cut some rates. so this mornings offer from ANZ might be outdated.
I will play this along, but it seems to me that they are all going to be much the same. And any 'amazing' offer I get to move will probably then be matched by my existing bank.
See how we go.
update 5.30. They upped the offer by offering to pay the legals. And hinting they might do better than the above.

I got a better rate with Kiwibank after trying other banks. - may be interested.

6months 4.35
1 year 4.35.
1% cash incentive on a $560,000 mortgage. $5600.
$4000 to break a 5.99% fixed term with ASB

i think its a bit rich (ha ha) saying there's no wiggle room when there are millions / billions made my banks annually in addition to i would add for those that can do the math that it don't matter a tuppinitoot what the difference is between deposits and loans when you factor in "FRACTIONAL RESERVE BANKING" to whisper it in your ear.

President of Property

Wait there is more coming as banks cut their margins to as low a 700 basis points the retail interest will go lower on the basis of reduced margins and or maybe swaps...

I till predict 3.99% by Dec 2015

1960 the Govt was lending at 3% for 30 years?

The only people doing the lending were Insurance companies and Building Societies. You had to be a policy holder of the insurance company or a member of the building society - they only lent what they had received by way of insurance premiums or member savings - they did not borrow from overseas funding markets - the only other lender was the Government State Advances Corp (I think)

If you wanted a mortgage from the 2 commercials it took quite a while - months

3.99% fixed for two years should be offered within the next 6 weeks. These greedy Aussie banks are making billions and they can afford to slash their margins. Do not run with a published rate - they will all do deals. Just been offered 4.99% floating and 4.29% for 1 year fixed!

These greedy Aussie banks will soon be looking at the quality of their loan books as they need to keep their equity ratios up.
It will be interesting to see who picks up the over leveraged and the amount that get called in for repayment
on the reverse those with healthy equity can expect some good deals

German colleague has a mortgage at 1.5%.
Think of the billions of $$$ of interest being sucked out of NZers pockets every year.
NZ = lenders heaven?

NZ maintains some of the highest interest rates in the developed world by choice. Our interest rate directly affects our exchange rate. Matching our OCR to the Japanese equivalent would almost certainly see our dollar trade below $0.50 Aussie. Maybe even $0.33 .This would drive hyper inflation in the short term because the cost of imports would skyrocket.

As a novice in regards to interest rates etc.... there seems to be a lot of talk about the OCR and how the rates have dropped because of the lowering of the OCR.

With China's economy declining slowly yet still in growth and with the US failing to increase their rates... how is likely to affect the 4 to 5 year interest rates and for how long can we expect these rates to stay as they are?

Better to ask a crystal ball rather than anyone who thinks they know what they are talking about.

In saying that, over the past 5 years you would have done best taking the cheapest shortest term loans. But in 2009 fixing longer worked best as rates rose. In 2008 fixing short was best even though it was the dearest option. In 2006 fixing 3 years would have worked best.

All a guessing game (albeit slightly educated). Opting for the cheapest 1 year rates assumes things will stay the same or get worse (lower rates) which may be a safe bet, but 5% for five years is historically very cheap and fixing long term when rates are at record lows is also a good strategy.

If you've done some calculations on what the break fee might be (bank dependent), fixing at the cheapest rate and being prepared to break to move to a long term 5 year rate if longer term rates rise could be a strategy if you have balls of steel and 20/20 foresight, but realistically picking the bottom in long term rates is just more crystal ball gazing...

So my advice is evaluate your risk appetite and decide whether you are prepared to pay more in the near term for 5 years of interest rate certainty.

thanks for advice, i am looking at playing it safe i think and fixing long term

just signed up 4.49% for 4 years, happy as Larry with that....

which bank?

I know 2 banks that were prepared to offer that rate, but you'd need to have say more than $3 mil in property and wont be a for a first timer etc