The Reserve Bank announced a further cut to the OCR of 0.50% taking us down to 3%. Further good news for those with mortgages.
We noted 2 months ago the ASB’s home loan 5 year fixed interest rate at 5.95%, and that one should be considering locking some debt in at that rate. We had hoped that the ASB move would have pulled the other Banks down to similar levels. This did not eventuate and subsequently ASB raised their home loan 5 year fixed interest rate twice. It now sits at an above market 6.75%.
As a result, we have increasingly come to the view that now is that time to be locking in some long term debt. The 5 year swap rate market seems to have stalled somewhat, after falling off a cliff the past few months. Banks are aware that there is a large chunk of the market that have recently come off fixed interest rates who have been holding off re fixing in an attempt to pick the bottom which leads us to suspect that they may not have a desire to discount these long rates. We suspect also that recent tightening of credit criteria is limiting home refinance activities,(the movement from one bank to another) thereby reducing competition. In addition, lenders are facing increases in their cost of obtaining funds to lend in the form of, increased margins on funds from offshore, the fee for using the government guarantee, and rising deposit rates here in NZ.
As such home owners, who have no intention of selling in the near future, could lock in half their floating mortgage debt now to a long term fixed interest rate, safe in the knowledge that they have received a historically good home loan rate. This allows the possibility of fixing additional debt in the near future if rates were to fall further, and has an added benefit in that you have now split your mortgage, so that regardless of future interest rate moves, not all of the mortgage will come up for renewal on the same day. This protects you from all of your loan rolling onto a substancially higher interest rate on one day in the future, and having to take, that interest rate on the day. As independent brokers we are always working towards your future.
If your lender provides a no cost “rate lock facility”, then one could secure the interest rate now for implementation in 60 days time. Given that Floating home loan interest rates are now below the 5 year fixed rate , you’ll eke out a few days on a lower interest rate, but with the certainty of a long term fixed interest rate coming shortly.
Our caveat is that further worldwide financial deterioration, raising the possibility of the US Government printing money, forcing up the price of long dated bonds, and thereby providing for a cheaper borrowing cost to our banks for the money they require from offshore. However if one is glued 24/7 to CNBC waiting for this to happen then you’ll be ignoring what i say anyway. 😉
We note the silence of Kiwibank, who has up until now, been very quick and vocal in leading the way with rate cuts.
As always, get in touch to talk through your re fixing requirements.
UPDATE: 24/3/2009 Well low and behold a couple of days after our post The Fed did announce the crank up of the printing press. This is the creation of paper money (actually they are doing it electronically) to increase banks capital with a hope of them increasing their lending. The word we received 2 days ago from someone trading the treasury markets was that this had merely stalled the rise in the 5 year swap rate yield curve.
The feedback we have received from the Banks over the past few days is that there are a lot of customers who have been re fixing their mortgages at the long term interest rates prior to the cutoff period for the recent rises in 3,4 and 5 year fixed interest rates. This adds pressure on these long terms rates due to demand.
The overnight rise in the DOW of 500 points on the back of a US Treasury announcement to facilitate the buy up of a $US1 trillion of toxic assets has today added 0.11% onto our 5 year swap rate. This is due to investors taking their money from the perceived “safety” of the bond market (ie: selling bonds and treasuries, leading to rises in interest rate yields) and moving their capital into more “risky” assets such as stocks.
Long term interest rates are to a large extent based on peoples expectations of the future, which helps to explain why these rates are rising now, despite the here and now in NZ commentary, remaining a little gloomy. “The market” is currently believing prospects for the future may be looking rosier.
We remain comfortable with the strategy of locking in some long term debt now dependant on individual circumstances.
UPDATE:30/3/2009 How rapidly rates have changed.!! There have been substancial moves in the 3,4 and 5 year fixed interest rates. Market demand has driven these up so rapidly that the ASB (as an example) raised their rates on Thursday only to raise them again on Friday night. The 5 year rate now sits at 7.50% and the 3 year rate is now 6.75%. The sudden and dramatic move in the 5 year rate has been sufficient to now make us question locking in this rate currently. We prefer a wait and see approach now. We suspect the Reserve Bank will not be overly happy about such sharp increases in borrowing costs, leaving open the possibility of a “market” jolting move or wording come their next OCR announcement on the 30th of April.