By Gareth Vaughan
The return to favour with borrowers of fixed-term home loans over floating rate ones has now seen the overall value of floating, or variable, rate mortgages drop NZ$6.6 billion in just three months and the value of fixed mortgages jump NZ$8.3 billion over the same period.
The latest monthly fixed v floating residential mortgage figures from the Reserve Bank show the value of floating mortgages at the end of July standing at NZ$102.173 billion. That's 58.6% of total mortgages, down from 63% in April, which was their highest point since the Reserve Bank started tracking fixed versus floating data in 1998.
By value floating mortgages fell just over NZ$2 billion in July, or 2%, with fixed-term mortgages rising NZ$2.4 billion, or 3.5%, to NZ$71.831 billion.
Since April the value of floating mortgages is down 6% and the value of fixed mortgages is up 13%.
April and May saw a round of cuts to fixed mortgage interest rates by banks and numerous media reports about banks competing hard for customers in a market with low overall volume growth. The rate cuts now see the banks' advertised, or carded, fixed rates for terms of up to two years lower - in most cases - than banks' floating rates. See all advertised bank mortgage rates here.
During July the value of fixed mortgages rose in all time periods tracked by the Reserve Bank bar five years or more. Growth in value of mortgages fixed for one to two years was NZ$1.4 billion to NZ$26.26 billion, and for two to three years it was NZ$553 million to NZ$6.9 billion.
Despite the switching from floating to fixed, growth in the overall home lending market remains weak. Reserve Bank sector credit data shows total housing debt up NZ$218 million in July, well under 1%, and up NZ$1.5 billion in the three months from May to July, still growth of less than 1%.
This article was first published in our email for paid subscribers this morning. See here for more details and to subscribe.
23 Comments
As I said a few months back, catch a 5 year fixed under 6% and run with it.
Ideally 50% fixed for 5 years at under 6%pa and 50% fixed short term for about 5%pa.
Given you should easily pay 7%pa off the principal each year with an interest rate averaging just 5.5%pa (on the basis that you were able to afford 10%pa interest rates plus principal), then with the above fixing strategy you would have virtually guaranteed having the mortgage being paid down to just 65% of today's level in 5 years time which in inflation adjusted terms (@2%pa) is just 55% of your current mortgage!
Fix in some certainty because chances are that inflation will occur sometime in the future, so spending some else's deflating cash at record low real interest rates now, makes perfect sense.
In that very unlikely event (assuming you couldn't see it coming and break the long term fixed at a cheap enough price), then you could borrow double what you currently have and with only 50% of the original amount fixed long term the average interest rate paid is 3.75%pa.
But realistically interest rates are not going that low. Stand alone house prices (like for like) in Central Auckland are up 30% in the last couple of years. In ChCh like for like stand alone homes in undamaged areas are up at least 20% since pre-eq.
Nothing much is being built to make up for the leaky or the shaken. Rents are rising. $20b in insurance monies still have to flow into the hands of property owners (despite eqc being in denial about how much repairs cost).
The chances of lower interest rates being the action required and those rates getting passed onto consumers is increasingly unlikely. Something less orthodox will probably be the outcome if the NZ economy grinds down.
Do you believe that banks would be able to offer just 0.5 to 1.5% term deposits? Perhaps just 0.35% after tax return? I think that there would be a rush into other investments, hence banks would having nothing to lend and interest rates would rise. The only way this would work would be if the banks were flooded with liquidity from the Reserve Bank.
The only way NZ could see interest rates at that level for starters, would be if some fear absolutely swept the country and property prices plunged 30 or 50%, in which case no one trusted real assets and they preferred nil returns to investment risk (as per the USA). For that to happen NZ would need vast tracts of unwanted housing - NZ doesn't have that. If prices did fall that amount, net income from a rental property would perhaps exceed 10%, so money would pour out of those 0.5% TDs. Prices would soar, as would inflation and consequently interest rates.
The only realistically possible scenario in which I can see 3% interest rates occurring, is a mass exodus.
All just so unlikely.
A great depression style shutdown is never a near term likelihood in a country where there is such huge inflows of foreign reinsurance capital on the horizon.
Rates may stay low for a long time, but Bernard don't you recall predicting interest rates being nealy 9% by now just 2 years ago!!
http://www.interest.co.nz/opinion/49780/why-variable-mortgage-rates-are…
I recall I gave my prediction back in 2009 when house prices were falling (and an unnamed someone was predicting a 30% fall!) that prices would slowly recover off their lows but remain reasonably stable for up to 5 years from the peak (2012/13) then see solid upward movement in good locations (though nothing compared to 2002-05).
It seems the events have brought that upward movement slightly forward...
2 months ago ASB offered the 5.99% special:
http://www.interest.co.nz/property/60043/asb-cuts-five-year-mortgage-ra…
Others have come and gone with similar rates.
As I said when ASB offered it - pick these offers up when you can. Alternative to waiting is to negotiate for a discount rate which might be in the low 6s.
You know the moral about gift horses...
Yes they will.
I emailed ASB and KiwiBank asking whether they would match SBS's five year rate of 5.99%m while also beating my current floating rate of 5.3% and provide an 18 month rate of 5%.
KiwiBank came back today with confirmation that they will, and ASB have indicated that they will also, but that have not confirmed the numbers yet.
A hard call, personally I think rates are going no where for years, many years. The only Q is really if there is much lower they can go which I doubt....the OCR may well hit 0.25% inside fo 2 years but what you and I pay doesnt have to drop with it. Im staying floating but my mortgage is so small it makes no odds otherwise yes I'd consider 6months especially as the banks are not charging fees to do it now.
regards
Short-term rates may be riskier than floating at the moment. If you fix at a great rate for 12 months you risk coming off the fixed rate at or after a time of rising rates. If you stay floating you can jump to a 2-3 year rate immediately if conditions look like moving upwards.
Best to keep floating, keep the gun loaded. You don't want to fix too early & risk undershooting.
Mind you, $350k @ 4.99 1 year fixed is $2200+ saving per year than 5.74% floating.
If you're going to fix now, do so for a minimum of 3 years - there is no risk of rising rates atm, but there may be in 2 years times.
I'm happy to be wrong and enjoy flat or dropping interest rates. However, the deflation scenario may come with other negative trends e.g. job losses, SME closures etc.
Anyway, here's a way to get a 4.95% Fixed rate for 30 years: (Yes, in NZ).
1. Slice your mortgage into segments. Float.
2. Take out a Westpac Mastercard with 50k limit.
3. Take out another bunch of CCs at combined 50k.
4. Withdraw 50k cash from other CCs (may take a few days)
5. Deposit 50k in bank - repay 2 segments of mortgage.
6. Balance transfer all the combined CC balances to your Westpac CC.
7. Enjoy 4.95% for 30 years on your WP CC.
Repeat with your wife/husband. There's 100k at 4.95% for as long as you like. Plus it's unsecured.
This of course will be subject to credit criteria. But it is entirely feasible, & demonstrates how low rates will probably be going into the future. Low low low ....
The current economic crisis shows no sign of waining, in fact based on what is happening globally, there is unlikely to be any significant growth in the next few years, so for the life of me I cannot understand why everyone is fixing their mortgages. Can anyone out there provide any positive economic forecasts in the next three years, I seriously think not, however the banks will be loving it.
Only one way interest rates will be going as we head into the darkest most turbulent period of modern history: Down, down, down, down ....
A few little tweaks upwards on the odd fixed rates are just banks testing out the gullibility of the customers - to see if they can hook a few more back to fixed rates & lock em in.
Growth in exports = flat + lower prices
Govt departments = cost-cutting, staff cuts
18 - 25 yr old unemployment = 25% & rising
Manufacturing = flat, declining
Provincial areas = mass emigration outwards
Chch = mess for years + decline in population
Credit growth = low or flat
Cash savings = growth. Money sitting tight.
Tertiary Education = capped, declining budgets, Govt funding on outcomes not bums on seats
Schools = capped funding - low population growth,
Mass disintermediation of traditional industries to offshore jobs & outsourcing = no middle class jobs & incomes
Now, let's consider the impact of OCR or Mortgage rate rises in the midst of all these factors = total depression scenario.
I locked in a 5.3% for 3 years 4 months ago and have another loan due to come off 6% in April next year. I reckon I'll probably get either the same rate or even less. I don't pay a cent in mortgage repayments myself as my investments cover all costs. Rates and economy will stay flat for at least another year. I understand Banks will still do a deal if you have the equity!
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.