Westpac economist says it's time to fix mortgages before interest rates go up; says 2 to 4 year fixed mortgages offer best value

Westpac economist says it's time to fix mortgages before interest rates go up; says 2 to 4 year fixed mortgages offer best value

Westpac Economist Dominick Stephens has released a research report saying it's time for floating rate mortgage borrowers to fix before interest rates go up.

He says two to four year fixed mortgage rates offer the best value.

Westpac's 2 year fixed mortgage rate is 5.79%, its 3 year mortgage rate is 6.10% and its four year mortgage rate is 6.5%. Westpac's Choices Everyday floating mortgage rate is 5.60%.

See all bank mortgage rates here.

Stephens, who talks in the video above about the latest economic data and previews next Thursday's Monetary Policy Statement from the Reserve Bank, pointed to a rush to fix seen in March and April 2009, which acted to push up wholesale rates, and eventually fixed mortgage rates.

"There was a rush of borrowers seeking to take advantage of low fixed rates, and only a limited pool of savers/investors willing to commit their savings at such low rates. Market forces quickly saw fixed mortgage rates rise," Stephens said.

"Waiting for the ding-dong low before fixing might make you part of a large crowd all hoping to exit through a small door at the last possible moment. The nimblest few will make it, but most will wish they had exited earlier," he said.

Stephens expects the Reserve Bank to hike the Official Cash Rate by 25 basis points in December, before rising to 4% by the end of 2013, 5.5% by the end of 2014 and a peak of 6% in 2015.

Wholesale swap rates, which are often the basis for fixed mortgage rates, have risen around 30-50 basis points in the last three weeks. See our interactive chart below.

Here's Stephens' full comments from the research note below:

Time to fix

Since mid-November last year the Fixed versus floating section of our Weekly Economic Commentary has consistently said “fixed rates are currently good value, given where we think floating rates are heading.” But we’ve also been saying “there is no immediate pressure on fixed rates to rise, so borrowers can afford to wait a little longer.” In other words fixing was a good idea, but waiting a while and then fixing was probably even better.

As it turns out floating mortgage rates have remained low and fixed rates have fallen, so floating was indeed the best strategy. But the balance of risks has changed over the past few weeks. Swap rates have risen sharply in February. Swap rates are akin to a “wholesale” fixed interest rate, and when they rise retail rates tend to follow. If these higher swap rates are sustained – and we think they will be – fixed mortgage rates will at least stop falling, and could even begin to rise. That makes now a very good time to fix.

End of an era

We regard terms from two to four years as the best value. Our long-held view has been that the Canterbury rebuild (among other things) will strain New Zealand’s limited economic resources and generate inflation pressure. The Reserve Bank will eventually have to respond to that pressure by increasing the OCR. And that, in turn, will push floating mortgage rates higher. The cycle in floating mortgage rates that we envisage is significant, but more muted than the 2000s cycle.

Financial markets have long seemed blissfully unaware of the looming pressures on our economy. Long-term swap rates have been priced as though the OCR will be nudged only slightly higher over the next few years. This means only a few OCR hikes are required to make a strategy of fixing for two to four years worthwhile.

The second possible cause of higher mortgage rates is the European sovereign debt crisis. The cost to New Zealand banks of raising funds overseas is now substantially higher than it was in mid-2011. In Australia, higher bank funding costs have already been partially passed on to borrowers and savers. Interest rates there have risen independent of the Reserve Bank’s official rate. We have long warned that the same thing could happen in New Zealand – retail interest rates could rise without any change in the OCR. The Reserve Bank has sounded a similar warning.

The only certainty is uncertainty

So we expect mortgage rates to rise a little this year. But by definition forecasts can be wrong. What about the balance of risks? There is a risk that mortgage rates could stay low for longer than we expect. But there is less risk of mortgage rates actually falling materially from here. First of all, the Reserve Bank has flatly indicated that it does not intend to lower the OCR, even if the global economy deteriorates quite seriously. The main scenario in which the Reserve Bank could relent and cut the OCR is a full-blown banking crisis in Europe. But in that scenario, mortgage rates would not necessarily follow the OCR lower. Global capital markets would probably freeze, making it even more difficult and expensive for New Zealand banks to procure overseas funds. The spread between the OCR and mortgage rates would widen further. Depending on the severity of the crisis, mortgage rates could actually rise rather than fall.

Why do today that which can be put off until tomorrow?  

Given that there are risks, and floating rates are low, why not wait a while longer before fixing? The trouble with that strategy is that others are thinking the same thing. If a rush of borrowers all try to fix at the same time, interest rates will be forced up by the surge in demand. Exactly that happened in March and April 2009. There was a rush of borrowers seeking to take advantage of low fixed rates, and only a limited pool of savers/investors willing to commit their savings at such low rates. Market forces quickly saw fixed mortgage rates rise. Waiting for the ding-dong low before fixing might make you part of a large crowd all hoping to exit through a small door at the last possible moment. The nimblest few will make it, but most will wish they had exited earlier.

(Updated with more details, links, and chart below)

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Anyone feel like we are stuck in a loop here...I recall the same article (re, fix now, from some bank) last year. Some of the punters on this blog fixed, as far as they commented, and what happened to floating rates!
Anytime a banker speaks about interest rates, I turn my back!

True - banks recomending fixing seems to signal floating rates are about to drop.

Couldnt agree more Lloyd, groudhog day and whatever a banker says do the opposite. I speculate westpac are bleeding a few customers, myself included. Shopped around and got a good discount on advertised floating rate thanks to posters on this site telling me to do so. I urge others to do the same, and not fix if you can handle a rate spike.

He's either right or wrong. It's going to be one of the two anyway.  But thats irrelevant.  He's just trying to sell us somthing.
If the fixed term mortgages are too cheap for their apparent value.  (He says)  Then clearly the floating rates are overpriced.  Instead of jawboning us, he could just lower those floating rates.
But it's not going to happen.  There is no competition amongst the cosy monopoly the banks have. (quadopoly ? - theres a word)  Because these banks will not let their margins drop.  And they don't need to have a meeting to arrange that.
The big four banks are a monkey on the back of our productive economy.  

Well, he can be right for the right reason or lucky and right for the wrong reason....the Q is to determine which.
From whats being said the OCR is now irrelevent to the retail mortgage rate....personally I think the OCR will be 1% odd by 2015, even by 2013...however the rate Westpac borrows at might well be circa 6% making retil mortages 8%...
Of course he cant say that I think....politically explosive....
Anyway at that point we will be so poked IMHO no one will be taking on debt to buy houses...
I agree, banks wont drop their margins, I think its like everyone else they have got used to their margins....however I think equally ppl wont borrow to lose money as house prices fall...
I really should think on buying a fireproof safe soon me thinks.
Its not so much the banks as the finiance industry IMHO....two things I have seen written that I agree with....for the last decade financial gambling has taken all of the profit out of things....this effect workers and employers.....and the other is its not workers v employers its workers, employers v finance.
Interestingly of course leverage or debt is encouraged because it reduces tax bills, in the hope of capital gains tax free, then instead the banks take the tax in the form of interest...ppl i think really need to get a focus on who's damaging teh economy....it isnt govn except by omission....

Does not worry me in the slightest. No more mortgage.
Wish they then put up interest rates on money in the bank though. 
I reckon a mix of fix/float is the way to go still. At least the people who fixed last year know how much they will be paying so they can then concentrate on other things that matter more like keeping their job.

Isnt this the guy that made some wacky predictions some time back? and these worked out well, yes?
If the OCR is >2% in 2015 I will be very surprised, I even think its most liekly below 1%.
(Edited for abusive language / bh)


Well we are in one of the longest low interest periods in many decades....which means the odds are as cycles go we are getting due for a change. With rates basically as low as they reasonbly can go, give or take a couple pionts, there is only 1 way to go, up.
And as time goes on these predictitons will get more accurate.
I cant see much more than another 12 to 18 months of rates being this low, but I also cant see anything that justifies an over night hike of several % with
"Waiting for the ding-dong low before fixing might make you part of a large crowd all hoping to exit through a small door at the last possible moment. The nimblest few will make it, but most will wish they had exited earlier,"
Yeah that "ding-dong low"  (or high depending of what markert one is trading in at the time) is the ultimate target, but in reality we are looking in the bottom of the curve, be it a little either side give or take a couple pionts.
From a marketing and longer term profit piont of veiw, I would imagine banks to increase the long term before increasing short term to hook customers in at a extra % or so when they do hike the floating.
So yes I do see it very prudent to keep an eye on things, hook in long term early, as this is a very long bottom of the curve, and very seriously consider around 9 months from now to hook in at "ding-dong low"
If someone is going for the 5% desposit, and the rates hike up, they are very likely to run into problems, mortgageee sales and stuff....so it maybe prudent for them to hook in now. For those who have the min  traditional 1/3 equity and few pionts or % will make little difference other than reduce desposable income a little.....and pick up a couple bargins at basement prices from the resulting mortgee sales.

I saw this guy at a chamber of commerce function once about 12 months ago.
He said that interest rates by now would be 2% higher than what they are. He wagged his finger at the crowd and said "definitely definitely' the signs were all there and he could see.
Eventually he will be correct and he can say I told you so. But I was very unimpressed with his talk.
Incidently Bernard, he also said that people on this site were mentally derranged (words to that effect) and didnt know what they were talking about. You should consider that before putting his vested interest laden rant on your site.

The guy is a tool and has been very wrong on so many occasions its a joke

Hes just saying if you look at the confidence of construction firms, the price of food and then you gut a small animal and analyse its entreils you can predict the future in the mortgate industry. Nothing odd about that really, druids have been using this logic to predict the seasons for centuries.
Funny that he doesn't know what Bollard is going to do to the OCR because it appears Dr Bollard just collates all the 90 day bill rates and follows them. As did Dr Brash,
My guess for February is no change will be made to the OCR.

Dunno, if you look at the wholesale funding rate chart.  It's creeping up - I wouldn't say bxgger it at this stage.  May be what he's saying has some truth in it.   

I have been watching floating rates slide out into the belly of the curve for a little while now, and wondering if meant a rise comming.  Especially with non mortgage loans, the 2yr looks cheapest at the moment.  I'm not that familiar with the long term spreads, but they seem pretty flat to me.  What's a "normal" (and I hesitate to use the term these days) spread between 6mth and 5yr?  I can never see the scale on the y axis with these charts.

Such a load of bollocks.  When a bank economist pontificates like that, he is merely a marketing mouthpeice for his organisation.  Westpac led the charge in 09 and dropped a low 5 year rate (6.5% ish ?) on the market and caused a mad rush for the long term money.  They used the ensuing chaos to lift all rates citing demand for scarce funding and raised all rates, at the same time as writing commentary like this one encouraging people to fix now.  
Opposing commentary at the time, indicated a long period of low rates, given the lack of positive data around at the time. The latter has proven to be true, and I would be very surprised if rates didnt have further to drop. This is a long slow deleveraging process and the pain is being slow released on the economy.  We are LUCKY our cash rate is still at 2.5%. Bad news will follow good news like night follows day. Studying previous interest rate cycles and trends won't guide you on this one. 
The bank margins are a disgrace, and are being used to fill the coffers before the next round of lending losses. What other industry is allowed to tax the entire borrowing population, to cover there shortcomings.
I would love to see the numbers if the mixed ownership model was extended to banks. Ie: Nationalise 51% of all the banks and control the rort in favour of the taxpayer.  Lsoing control of our financial system has been a huge failure of this countries governance over the last 30 odd years. 

Okay , so I will print this atricle and keep it to see if this actually happens as predicted.
Frankly , I dont see the OCR going up anytime soon .  New Zealands one- track- dairy -economy is struggling in recession mode even though we have positive growth 
The economy is still teetering on a knife edge , and while inflation is benign, workers are still losing their jobs , GDP growth is anaemic and the Cantebury wont happen until someone decides that Christchurch cannot be re-built on this unstable fault line .
It could take years , and the massive rebuild that Fletcher Building is hanging its hat on may never happen 

Problem is if you fix for say 1 year @ 5.49% then in 9 months time the rates stat rising then you are locked down for 3 months and can't jump to another fixed. Maybe best to stay floating for another 6 - 9 months then fix for 2 to 3 years.  Better to take the money now than in some fictional future.   
There is no immediate incentive to fix right now  -  the employment situation in NZ is freezing up,   the OCR will be dropping, the CPI will be flatlining (apart from food, petrol, power, insurance, rates -  oh yeah that's pretty much most household costs!), it's only the banks 'stories' of their amazingly high cost of wholesale borrowing that threatens borrowers.     
Try tracking the floating rates of the USA, UK, Germany, Taiwan, Japan  -  they are about 3 or 4% .....  Australaia the main outlier

KH -" The big four banks are a monkey on the back of our productive economy.  "
I'm wondering who's big banks do you want, the US' s, Uk's, europeans? then maybe not big banks perhaps small banks like say, Iceland's ?  Perfect we'd have no banks now ?
We need to be careful with what we wish for

Wholesale rates are up nearly 0.50% in the past month or so, thats not banks talking its the market. Obviously the market is looking at higher rates in which case retail rates are now probably well overdue to rise as the wholesale rise pressures retail banks margins  - unless someone can promise me floating rates a lot longer at these levels than just for 2012, I'm fixing pretty soon personally - the only thing that makes me hestitate is locking into margins at these levels which I'm equally convinced are on their highs.

Olly Newland, who has correctly predicted so much in the past, now  cautions us against a rush to judgement whether to float or fix.
he says that rates have been cut and cut again in recent weeks so a little care is required he says and it may be just a ploy by the banks to hang onto customers and slow down choice. 
From his website: 
    "The question has come yet back again whether now is a good time to fix or float your mortgage.

I am a big enough cynic to believe that what the bank(s) really want is to capture you as a customer. While floating, a borrower can change banks with ease with no little or no cost, and the ability to shop around.

Once locked into a fixed rate it’s all a bit too hard.

At present the banks are fighting each other and cutting rates to obtain an edge. What could be better for them to offer a fixed rate and stop worrying about customers wandering off ?

In my view I would stay floating as it will be obvious if fixing  becomes  necessary simply by keeping up with the latest financial news."   

Rea d it here:



Last month I observed the banks in Australia uncoupling from the OCR.  There were howls of outrage when, after the Reserve Bank leaving the OCR unchanged, banks raised interest (lending) rates.  These same banks operate subsidiaries here and the same justification is that their lending costs are rising.  This is due to the fact they source their funds on the international market, not only from domestic depositors. 
The RBNZ has been nudging banks to have specified ratios of their funds sourced locally, but if international rates are significantly more than local rates, domestic deposits will dry up as money moves to where it can go for the best yield at lowest risk.  That would impact on liquidity and this pressure would force up rates too.
That said, I'm a bit sceptical when banks seem to lead the charge to hike lending rates but hold back from adjusting deposit rates.  My scepticism is further boosted when I see such big increases in bank profits when they have effectively been given government (tax payer) guarantees.
Like other commentators, I also think this report feels like de ja vu.  Around June of last year the banks were trumpeting the need to fix in advance of imminent interest rate rises that did not eventuate.  I fixed some of my mortgage for a year, and left the balance on floating.  As a result, I ended up paying a few % points more for the fixed portion over the floating.  The additional cost was actually quite low.  As I see it now, the difference between the floating rates and the fixed rates for up to two years is also very small.  Accepting that interest rates are at the low end of the cycle, it is logical to expect that they will rise, esp after having seen the aforementioned activity in Australia last month.  Fixing some of the mortgage gives some certainty for negligible cost while allowing flexibility to pay off the floating portion.
My personal approach is to look at how much of the mortgage principal I could possibly repay during a period that I want to fix for.  For example, if I have a $300k mortgage and can comfortably reduce this by $50k p.a., I might fix $200k for two years and float $100k. 
I endorse others' comments about shopping around, its surprising what the banks will do to get you to commit to them for a couple of years, or more.

Why bother? the bank gets what it want regardless of what you chose. Let's not pretend banks actually care about saving their (suckers) customers money. If that were the case they would call you every few months/years with a better deal.....but no

To be fair Justice, banks do have an interest in persuading, say, a young couple with a combined income of $85,000 with a new mortgage of $350,000 at 95% LVR that it would be better for them to fix for 2 or 3 years as they may not be able to keep up the payments if their floating rate hiked up by 200 basis points.    So such advice may be good for both parties, given the situation.
Banks would rather that every customer kept their payments on their loans on time  -  rather than try to put us all on inappropriate rates?   However you would think that they would have a smart CRM system that analysed the range of your accounts then advised you to re-juggle things to better your situation...... Wonder how many people still are paying 8 or 9% on old fixed loan segments that they probably should have broken by now and enjoyed the current floating rates?

I have no doubt you're right MortgageBelt  - when it is widely reported for everyone to see that banks make bigger margins from floating loans, why do people make such stupid comments, such as Justice & Asterix above,  about banks wanting to trap you into fixed rates. Economists try to add some value, but like all forecasters do get it wrong from time to time - most people frankly have since have since the outset of the GFC, and the ones that haven't are often ignorance of a whole lot of factors involved

You have been better off on a floating rate over the last 3.5 years.   If you were quick in 2008/9 you may have been able to break your fixed rate of 8/9% fixed & drop to floating of 5/6%.
Fixing only buys a limited amount of time anyway -  your loan may have 10 - 30 years to go, you will never be able to avoid the impact of global trends, shocks, etc over the whole duration, so why worry? 

Very true, rates will average what they will over the full term of your loan. However , fixing makes sure that you get a better chance to enjoy the full term by avoiding a death experience to your ability to service debt when you're at a vunerable stage.  

Grant A - of course they try to 'trap' you into fixed rates.  When an economist from a bank speaks, they are trying to influence their own business mix,  not to positively affect the amount of money in a customers pocket.  Surely you understand this?
The banks behaviour in general in entirely skewed in their favour, pretty much ALL the time. Take for example fixed rate penalties:  A bank will contract you into a fixed rate term, and if you choose to break early and interest rates happened to have dropped in the interim, you will be required to pay the difference in the form of an early repayment penalty. HOWEVER - if rates happen to have risen and you want to repay early, the bank will generate a cash benefit. This benefit is NOT repaid to the customer as would be fair and reasonable. It is queitly pocketed by the bank.  Incidentally - banks paid these benefits up until thye mid 90's then quietly changed the policy and no one really noticed. 
Banks are commercial and will try to make as much money as they possibly can.  This is a problem when essentially they can tax the entire borrowing population via un regulated margins whenver they need to fill a hole in their coffers (usually due to poor banking practice in the first place).
Banks are such a critical part of of our system that allowing full foreign ownership is crazy. 

So if longer term swap rates are falling and banks are reacting accordingly should we not be stting tight for just a while longer to see if they will fall further? I think the banks have noticed that  not many of us floaters are keen to jump just yet - that's what all the fix now hype is about!! I'm by nature not a gambler but I am quite willing to place a punt on a bigger carrot in the not to distant future. Forget the short and medium term rates - I think the banks will be tweaking the 3-5 year rates a fair bit more - that's where I see a rates war heading between the banks. Entrapment at some kind of level is inevitable, hell it's not our money, we're only borrowing it, but I'm near certain that we as consumers can impact on the banks if we all stand firm and just sit on our hands. They will be forced to make borrowing even more attractive if they want us to lock in for any length of time. Or maybe I'm just being naive!