Rising mortgage rates - and how to mitigate them
Rising mortgage interest rates - and how to mitigate
20 July 2006
Just like petrol prices, mortgage rates are rising dramatically, and right when a disproportionate number of loans are up for re-fixing. interest.co.nz looks at why this is happening now, and what mortgage consumers can do to mitigate these rising costs.
interest.co.nz has today launched its new and powerful mortgage calculator, designed to help people with the classic mortgage problem – how to decide what is the best option when a fixed-term rate contract is up for rollover. See http://www.interest.co.nz/calculator
It has been a little over two years since the outbreak of the so-called 'mortgage war' where BNZ withdrew from working with brokers, and claimed to be able to pass the resulting savings on directly to homeowners.
It took a few months for the other banks to react but since then, consumers have benefited from fixed mortgage rates that have been lower than they would otherwise have been.
This ‘war’ started with loud bangs and much shouting. Consumers accelerated their shift away from floating rate products to fixed rate contracts, lowering their monthly repayments.
The shift from floating to fixed is impressive. In July 2004, almost one third, or 31% of $91.2 billion in residential mortgages were floating. Today, only 17.5% of $118.8 billion are floating.
That competition for your mortgage has also seriously undermined the RBNZ’s inflation targeting tool, the OCR.
The sharp end of BNZ’s market attack was aimed at winning two-year fixed contracts – and as it is now two years since these market shifts started, there will be huge volumes of contracts coming up for renewal in the second half of 2006.
It is estimated that more than half of all mortgages – more than $60 billion in contracts – will be up for review in the next year, and a disproportionate number will be due in the next six months.
In anyone’s language, $60 billion is a huge number. Put in perspective, that is worth about the total value of all NZ’s international trade for a year – imports plus exports.
Two years ago (July 2004), contracts were being done for a 2-year fixed mortgage at between 7.35% (HSBC Bank) and 7.60% (ASB Banks).
Today, borrowers are looking at between 7.75% (Kiwibank) and 8.30% (HSBC), and rises are being announced every few days. Those institutions offering lower rates will soon be raising them. And all institutions are facing higher costs of funds which will mean rates will keep on rising further than where they are now.
Most borrowers could be facing increases of at least 1.0% in their interest rate – on a $100,000 mortgage, repayments will rise at least $13.32 per week, or $693 per year, for a 15 year mortgage.
Two years on, the really sharp rates are at longer contract terms – some of the lowest rates are for five year fixed contracts.
But look further behind the advertised offers, and the position is less clear. Some banks offer worthwhile discounts for certain products – and some require a monthly fee for those benefits.
As an example, Westpac’s Redpac program currently offers a rate of 7.55% for a loan of at least $250,000 fixed for 5 years. If you are coming off an old 2 year contract at 7.40%, the monthly repayment penalty will be easier to take, than say, BNZ’s 7.70% equivalent rate. With free banking, discounted insurance, and other benefits, it could save you even after accounting for the Redpac monthly fee of $25 per month.
The point is, there are a very wide range of options out there, and the only way to really find the best lowest-cost choice for you, is to “do-the-math” !
A new and sophisticated tool has been launched by www.interest.co.nz to do just that. Their new and independent Mortgage Calculator enables anyone to compare two competing mortgage offers, and instantly see the total cost comparison – something bank calculators won’t tell you.
It also lets you explore for the best set-up. In the same tool, you can easily see what the effect is of lengthening your loan period, or shortening it. It easily recalculates how much you can borrow. It will even show what interest rate you can afford.
Should you repay weekly, or fortnightly, rather than monthly? How do end-of-loan balloon repayments affect your outgoings?
And above all, what are the impacts on all of the above variables on your total cost?
Working through the numbers is the only way you can be sure you have made a smart mortgage rollover decision, and this new calculator is a powerful and sophisticated tool for that purpose.
This new and accelerating round of rate rises is being caused directly by a sharp increase in wholesale funding. Swap rates are rising across the board, and the swap market is the mechanism by which international money is drawn into New Zealand for use in financing our housing transactions. Fast economic growth in the USA, China, and a number of other large economies, and a recovery in Europe, along with fast rising oil and other commodity prices, is putting serious upward pressure on global inflation rates. Central banks are responding with rising policy rates. Higher international rates flow directly into New Zealand mortgage pricing – and there is little likelihood in the short term that there will be either a pause or rollback in rate direction.