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Stability Continues In Mortgage Sector

Stability Continues In Mortgage Sector Despite Appreciating Economy

According to the latest Mortgage Survey conducted by the Real Estate Institute of New Zealand this morning, competition between lenders appears to have driven most to adopt closer competition in terms of rate, particularly for fixed one and two year term offerings.

REINZ National President, Graeme Woodley, commented that only one lender had decreased their floating rate during the month.

“Despite the current Official Cash Rate (OCR) remaining unchanged, only one lending institution decreased their rate by 15 basis points during the month and floating rates continue to sit in a range between 6.95 percent to 7.85 percent.

“With the OCR continuing to sit at 5.75 percent there is arguably room for more competitive behaviour at this short end of the market.”

Graeme Woodley said the current market appears to continue to be dominated by a fairly steep difference between floating rates and the rates for fixed two to five year terms, with an average 61 base point differential on the two year fixed rates.

“This obviously flattens out on longer terms with five year rates starting to approach the average floating rate.”

Fixed one year rates ranged between 6.75 and 7.00 percent; while two year fixed term mortgages rates on offer sat between 6.75 and 7.25 percent. One lender was offering a “honeymoon” six month fixed mortgage at 5.99 percent.

Three year fixed mortgages average rate was 7.24 percent with the average for four year rate sitting at 7.27 percent and at 7.44 percent for five year fixed terms.

Graeme Woodley commented that, as can be seen in the table and graph below, five year fixed rates are still cheaper than floating rates and borrowers must speculate on both international and domestic trends when deciding what rate to borrow at.

Clearly international trends have a major effect on the New Zealand market. Currently the New Zealand Government 10 year rate has a 2.2% (220 basis point) spread over US Federal 10 year rates. This clearly presents significant opportunities for both foreign and domestic investors and traders, but near term increases in the NZ dollar foreign exchange market disfavour NZ dollar denominated investment in our currency.

Dr Allan Bollard, Governor of the Reserve Bank of New Zealand said in late January this year, “…For the moment, it is appropriate to leave the OCR unchanged, reflecting the strong growth in the New Zealand economy. However, the balance of risks around the future path of interest rates has shifted. If the exchange rate remains at around present levels or appreciates further, and if the evidence points to reduced pressures on resources and medium term inflation, then there may be scope for a cut in the OCR later in the year”.

Graeme Woodley suggests “That there appears to be at least some certainty in borrowing long, and while the mortgage rates yield curve inversion remains as dramatic as it currently is, it seems difficult to justify borrowing short unless one is extremely optimistic about the Reserve Bank’s need to cut the OCR”.

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