ASB leads with new fixed rate increases

Personal Finance

Wholesale rate pressure has pushed one of our largest home loan lenders to raise some key fixed rates and setting their market offerings as the highest available

14th Oct 21, 12:29pm by David Chaston

$Doing the math$

ASB may have decided to not raise its floating rate to give "peace of mind" to some customers, but this clearly doesn't apply to borrowers of fixed rate home loans.

This mortgage major has raise fixed rates for four terms as follows:

For one year the increase is +14 bps to 2.99%. That makes it the highest one year fixed rate among the five major banks and now the highest of any bank for that fixed term.

For eighteen months the increase is +20 bps to 3.29% and also a market high for any bank.

For a two year term, the market-high story is the same, raising its rate by +20 bps to 3.45%.

And for three years, the new ASB rate is 3.69%, a +14 bps rise and also higher than anyone else.

The driver is the relentless rise in wholesale swap rates, a rise other bank rivals won't be able to avoid either. See the swap rate charts below.

These rates are at or near their highest since May 2019 - and back then the average bank one year rate was 3.90%, the two year was 3.95% and the three year 4.05%. For the equivalent wholesale rates, today's retail rates look low by comparison.

One useful way to make sense of these changed home loan rates is to use our full-function mortgage calculator which is also below. (Term deposit rates can be assessed using this calculator).

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. But break fees should be minimal in a rising market.

Here is the updated snapshot of the lowest advertised fixed-term mortgage rates on offer from the key retail banks at the moment.

Fixed, below 80% LVR	6 mths	1 yr	18 mth	2 yrs	3 yrs	4 yrs	5 yrs
as at October 14, 2021	%	%	%	%	%	%	%

ANZ	3.55	2.79	3.09	3.25	3.49	4.59	4.89
	3.55	2.99 +0.14	3.29 +0.20	3.45 +0.20	3.69 +0.14	3.99	4.29
	3.55	2.85	3.09	3.25	3.55	3.99	3.99
	3.55	2.95		3.15	3.49	3.89	4.19
	3.29	2.85	3.09	3.25	3.49	3.99	4.29

Bank of China	3.45	2.45	2.65	2.85	3.19	3.65	3.95
China Construction Bank	2.65	2.65	2.65	2.85	3.25	3.55	3.99
Co-operative Bank (*FHB only)	2.85	2.65*	3.09	3.25	3.49	3.99	4.29
Heartland Bank		2.35		2.60	2.90
HSBC	2.89	2.69	2.89	3.09	3.29	3.59	3.84
ICBC	2.85	2.45	2.65	2.85	3.15	3.65	3.95
(*FHB only)	2.79	1.99*	2.85	2.95	3.25	3.65	3.95
	2.89	2.79	3.09	3.25	3.49	3.99	3.99

Fixed mortgage rates

Select chart tabs

Source: interest.co.nz

Source:

Daily swap rates

Select chart tabs

Source: NZFMA

Comprehensive Mortgage Calculator

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21 Comments

by ikimpaul | 14th Oct 21, 2:37pm 1634175420

I thought they might all go again prior to the Nov OCR. So now ASB's rates have increased by .7% in the last 4 months. This will add $180 a month to a $500 000 loan and $375 per month to a $1 000 000loan.

I'm predicting the big 4 will all have lifted their rates by this time next week.

by dictator | 15th Oct 21, 9:47am 1634244426

The rates are back to what they were 18 months ago. Those refixing will be on similar or lower rates. The increases past this point will be the ones that start raising the interest cost.

Too bad many will have loaded up on other loans or payments with the "spare" cash as the rates have lowered.

by 7jai | 14th Oct 21, 2:38pm 1634175515

Be quick.

by Yvil | 14th Oct 21, 4:53pm 1634183638

Getting close to a full 1% higher than the all time lows of a few months ago, this WILL put the brakes on the housing market, just give it time

by SmoKey | 14th Oct 21, 5:15pm 1634184933

Will there be another increase before Christmas ?

by dictator | 15th Oct 21, 9:50am 1634244649

There's a lot of fear in the bond market right now, and with good reason. Even 10 year treasuries have almost returned to their previous rate despite the new Fed policy on liquidity without having swap treasuries or other collateral.

There is a good chance of another increase as a Christmas present from the banks.

by Contrarian | 14th Oct 21, 5:42pm 1634186524

As per Bloomberg : Westpac, Commonwealth Bank to Require Vaccines for Staff

So, it will come here too for ASB and other bank staff ?

On the rates, why not give a discount to fully vaccinated borrowers ?

by CWBW | 14th Oct 21, 5:50pm 1634187015

Looks like a golden opportunity for an interest arbitrage play.

Done properly, the effective interest rate on your mortgages can as low as 1% p.a.

It's time to talk to your financial advisor.

Be quick!

by fortunr | 14th Oct 21, 7:16pm 1634192198

These increases are just the beginning. It is just a question of time before this start having significant effects on the housing market, and it is not going to be pretty. Houses increased by 30% after 75 bps cut to the OCR: what is going to happen when these cuts are reversed so that the OCR gets back to 1%? And what is going to happen when, as swap rates are clearly indicating as an almost certainty, the OCR doubles from 1% to 2%?

I feel for the first home buyers who recently bought a house.

by Keen Learner | 15th Oct 21, 6:38am 1634233084

Could you elaborate a bit more on the part that swap rates are playing and how their behaviour impacts/can help forecast mortgage lending?

by Fluffybunny | 15th Oct 21, 9:50am 1634244625

I wouldn't. If things do back track then you just stick your head down for 10 years whilst you pay off some debt.

If your so borderline that you cannot take market swings, employment wobbles etc. That's a different problem. But no different to me than someone maxing out credit cards on handbags.

by AUS | 14th Oct 21, 7:32pm 1634193177

101 question, what actually drives up swap rates and therefore mortgage rates if the OCR doesn't move?

by Keen Learner | 15th Oct 21, 6:17am 1634231827

I too don't understand swap rates and the roll they are playing in mortgage rates, which (judging by this article) is not minor. Can some more knowledgeable people comment, please?

by ikimpaul | 15th Oct 21, 8:33am 1634240026

here is a really simple explanation

https://www.investopedia.com/terms/s/swaprate.asp

Swap rates work a little like buying milk or iron ore on the commodity markets or exchange rates on the exchange market. Banks and lenders swap a fixed interest rate for a variable interest rate on the international markets and the interest rate charged is based on what the lender predicts the interest rate will be when the loan matures.

More simply international markets are swapping loans - the idea is the lender wants to make money on the swap so they lend at what they think market rates will be when the "loan matures" - in most cases these loans / swaps are short term in some cases only days- but most of the time months and a few will be years (usually less than 5 years)

The rate that is paid is based on what the market thinks the interest rate will be when the loan matures ie has to be paid back - part of this prediction is what they think central bank OCR's will be and what wholesale markets will be doing. The lender needs to make sure he doesn't get a deflationary effect, so when wholesale swap rates are rising they are predicting that the central banks will raise their OCR's.

IT's complex but quite simply wholesale rates rising are an indicator that the markets are predicting the OCR (official cash rate) will also rise.

The same concept works on futures markets for commodities. I can buy at the moment milk powder for delivery in Jan - the milk wont be produced by Dec but I can place an order today based on what I think the milk price will be in Dec.

by ikimpaul | 15th Oct 21, 8:38am 1634240308

Another good article

https://corporatefinanceinstitute.com/resources/knowledge/finance/inter…

the reason swap rates influence mortgage markets is they become the rates that banks can borrow international funds at. If a bank borrows $1 Billion to lend next month from an international bank- if the wholsesale interest rates has risen and they need to pay the loan back in 6 months - then they need to lend at least at the "wholesale rate that they pay back in 6 months" to mortgages to make sure they dont lose money.

Most banks will actually lend at wholesale rates plus a little more (this is there margin- most banks make between .3-.5% margin on wholesales rates). So in order to the bank to borrow to lend on mortgages they lift their fixed interest rates to match the wholesale rate + their margin.

by Contrarian | 15th Oct 21, 9:56am 1634245018

How does OCR factor into this future rate assumptions which drive the Swap rates ? If the Central Banks can assure funds at a reasonable rate to the Banks, can the Swap rates become irrelevant completely ?

by dictator | 15th Oct 21, 10:29am 1634246949

In NZ the OCR is just the overnight rate in the bank's accounts at RBNZ. While it has an influence RBNZ expects the banks to toe the line. In this case the last increase was expected because the OCR is now trailing the market (NZ is too small to influence a multi trillion USD market).

In the event that our banks are unable to obtain capital from the market then RBNZ is a lender of last resort. If the banks used RBNZ as a primary source of capital we would be in the middle of a financial collapse.

by Contrarian | 15th Oct 21, 11:03am 1634249025

But that is what has been happening in the US, right ? The Fed seems to be an active participant in making free, easy funds available to the Banks there, making them rich, enabling them to lend and boost the economy. This also drives the swap market internationally, right ? I agree that USD being the reserve currency allows them to do that. But what if other countries follow suit ?

by dictator | 15th Oct 21, 11:15am 1634249721

There's a lot of coordination between central banks via the Bank of International Settlements. The market is changing and the central banks have to change with it or they won't be able to convince anyone that they have control.

The Fed itself sells the bonds to the banks at a discount, then the banks immediately flip the bonds to various hedge funds. They can only resist reality for so long. All they've done is pump up a huge bubble and there are some hedge funds that seem to be on the brink of collapse for the past year. To prevent collapse the Fed is operating some very loose accounts (these accounts are not limited to bank as they are here, the Fed is lending directly to hedge funds).

When it goes horribly wrong the Fed will say they never saw it coming/no one could have predicted it.

by ikimpaul | 15th Oct 21, 11:19am 1634249940

Not Quite - what your describing the US as doing is Quantative Easing - NZ also did QE in the last 12 months

Quantitative easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment. The securities bought are usually government bonds.

https://en.wikipedia.org/wiki/Quantitative_easing

This is very complex, but basically it does create "cheap money" for banks to borrow from the RBNZ- the banks then give that money in cheap loans - but it doesnt go on forever - In NZ's case the RBNZ has started to wrap up their Quantative Easing and banks must now go back to the wholesale market for most of their funding. So effectively this is why NZ interest rates started to increase over the last 4 months - In July the RBNZ announced they were winding back their QE.

Their is a downside to QE. IT's primary role has been to help prevent unemployment in economic downturns-more money supply means more money can be lent to businesses to invest which creates jobs.

However there is a school of thought that it may also result in inflation particularly when there is a supply shock like now and people will use the extra money supply to pay more for scarce resources like labour and materials. When there is high inflation central banks raise interest rates to slow demand and stop inflation, however raising interest rates creates the possibility of unemployment as businesses find it too expensive to borrow and dont grow their businesses. The fix for unemployment is to lower interest rates.

This results in a delicate balance for Central banks- who need to slowly lift interest rates to slow inflation but not blow out unemployment at the other end.

by Luke83 | 15th Oct 21, 9:46am 1634244388

Yawn, next click bait headline please.