The emerging trend for new owner-occupier mortgage borrowers to go for short fixed terms is accelerating.
The Reserve Bank (RBNZ) introduced the C71 data series, which details mortgages as they are actually drawn down and for what terms they are fixed for last year. It only goes back as far as 2021, but offers interesting insight into what the borrowers are thinking - and also shows to some extent what offers the banks have been pushing at various times.
Clearly at the moment borrowers are looking forward - but not very far forward - to the time when mortgage rates might be falling again soon.
The latest figures, which are for January 2024, show that of the $3.123 billion borrowed by owner-occupiers during the month, some 76% of it (including that on floating rates) is for terms of 18 months or less.
In December 2023 the comparative total was 69.8%, while if we go back to January 2023 just 52.3% was for terms of 18 months or less.
As the RBNZ outlines in its key points summary, the top choice for term in January 2024 was the one year term, with just over a third of the owner-occupier mortgage money being fixed for that duration. The 33.1% figure for one-year terms is up from 27.7% as of December 2023 and from just 20.1% in January 2023.
The January figures show that the 18-month term, which has been fast-rising in popularity, fell back a little bit, with a 15.3%, down from 18.7% in December 2023, but well up on the 10.5% figure for January 2023.
But the thing that really demonstrates the expectation that interest rates will start being reduced soon is the very sharp rise in popularity of the previously very unfashionable six-month term.
A year ago, in January 2023 there was just 2.5% of owner occupier new mortgage money on a six-month term. That had risen to 6.5% by December 2023 and was a new high for this data series, which is admittedly only short run, dating back to 2021.
But in January 2024 a new high water mark was set for the six-month term with 10.3% of the new owner-occupier mortgage money going onto this term. And interestingly, the actual amount of this money, at $332 million, was actually the highest since the start of the series too - and that's despite the fact that the overall amount of money borrowed by the owner occupiers dropped from $4.948 billion in December 2023 to just $3.123 billion in January 2024.
And the interest in going super-short is not confined to the owner-occupiers either. The share of new residential investor lending on 6-month fixed terms increased from 8.5% to a new series high of 17.8%.
Based on this sort of thinking it looks like these new mortgage holders are hopeful that interest rates may be in their way down in the second half of this year.
It's worth noting that the wholesale interest rate markets are pricing in a two-thirds chance that the Reserve Bank will make its first cut to the Official Cash Rate (currently at 5.50%) in August. The only problem with that is the RBNZ doesn't reckon it will be cutting the OCR till next year, according to its latest set of forecasts.
Time will tell whether those punting on the six month term have been proven right. And really, at this stage it is anybody's guess.
17 Comments
As expected. The banks have talked the HFL stuff for a long time. But the fact that anyone is fixing for longer than one year remains a mystery to me.
And also as expected. Or should I say, and so it begins ...
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I'd say the banks are sucking people in here. This is what they normally do. Offer a teaser short term rate with an opinion that rates will be lower in a short period of time. Only.....people are likely to come out of these short term periods and find rates are actually higher....
The maths doesnt make sense to me. If you are choosing to take a 1 year rate of 7.29% over a 2 year rate of 6.85% then that means you are expecting to be able to get a one year rate lower than 6.41% in a year's time. That's a mortgage rate cut of more than 88 bp in the next 12 months, when the Reserve Bank has said it wont begin cutting until next year. Even if the bank cuts 50 or 75 basis points by early next year then that still wont be enough to make taking a 1 year rate worthwhile. So with inflation still at 4.7% and overseas inflation proving sticky at 3-4% how likely is it that RBNZ will decide to cut 100 bp before March next year?
I'm not talking about floating rates. Those are the rates for fixed 1 year terms. I am assuming someone rolls off a 1 year fixed rate and on to another 1 year fixed rate. The new 1 year rate must be lower than 6.41% in order to make the maths work (ie. pay less interest over 2 years than paying the 2 year fixed rate)
The point I was making is that the rate curve seldom moves in unison. Also, a 100 bp reduction is clearly much more valuable on a 5 year term than 1 year.
So I guess the strategy people are using is, I'll take a hit on the shorter rate for now with a view to locking in a much better long rate at rollover.
Stake in the ground from me. In the last month, I bought a townhouse in Grey Lynn, I rented my property in Te Atatu South. Totally bucking popular interst.com views and predictions. Why I think it is a good time to be a landlord, house rented in two days (majority of people looking for a place due to landlords selling/I did the opposite I held my property) 2. Market flooded with people Selling/ I did the opposite as above I bought - Shall we compare notes in a year? This is just a counter view to anyone who thought about investing in property. My opinion is mine and I am not trying to sway anyone however I am also not trying to tell people the worst is yet to come.
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