NZ Mortgage Rate Update November 2010

Posted on Friday, December 3 2010

NZ Mortgage Rate Update – November 2010

When it comes to mortgage rates there are some interesting dynamics at play.
The first is overall bank profits. As volume growth has dried up, the banks have looked to increase profits through higher mortgage margins. Industry mortgage growth (2.5% pa) is at its lowest level in 17 years. Mortgage approval volumes at 5,000 per week during September were down 25% on last year and are the lowest seasonally adjusted level since records started in 2003.
However mortgage margins have increase from 0.80% to 1.80% even after allowing for higher funding costs. Banks have made some hefty windfall gains as existing fixed rate mortgages mature and roll on to floating or new fixed rates at much higher margins.
The second dynamic is Kiwis switching into floating rate mortgages. $67 billion of our market is now in floating rates compared to $21 billion 2 years ago. Similarly, fixed rate mortgages with greater than 2 years to maturity have reduced to $12 billion from $35 billion 2 years ago. The mortgage book is shortening reflecting lower short term rates.
As a result, low demand for fixed rates has helped keep wholesale funding costs low. In fact wholesale rates have been as low as when the market bottomed in early 2009. Mortgage Rates haven’t fallen as much as they did back then, because banks are taking higher margins.
Current Mortgage Rates
The low wholesale rates have meant that banks have high margins and some room to negotiate. We have been able to easily knock 0.25% off carded fixed rates. I would consider 6.44% for 2 years and 6.85% for 3 years to both be good value-for-money rates.
You will see this discretion disappear long before the advertised rates increase. In other words you will not see it coming and won’t accurately predict the best time to change track and fix your mortgage. As such I have been encouraging clients to lock in fixed rates now. Better the bird in the hand, or something like that!
Outlook for Rates
Wholesale rates have already started to creep up a bit from their recent lows. This is to be expected. As home owners start to switch into fixed rates over the coming months this will put upward pressure on wholesale rates and therefore fixed mortgage rates. Luckily with most Bank Economists telling home owners to stay floating, the rush to fix has not started yet.
Mortgage Rates are likely to increase next year by between 0.50% and 1.00%. Beyond that I’m not expecting a lot of movement. As such it would be prudent to plan your mortgages based on a rate of 7.50% or 8.00% if you’re a bit more conservative.
Mortgage Recommendation
My view is to hedge your bets. Starting putting some of your mortgages into 2 or 3 year fixed rates and leave the remainder in floating.

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Expert's Bio

John Bolton

John Bolton is the owner of Squirrel Mortgage Brokers. He is a regular market commentator and a previous GM at ANZ National Bank. Squirrel Mortgage Brokers are the independent mortgage experts.

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