Mortgage Rates: Let the summer craziness begin

Kid playing in the sand

It’s hard to write about mortgages every month and keep it interesting! This month has been easier with the landscape subtly changing, mostly for the better. Apologies for the summer photo. I had contemplated putting a picture of rain clouds! On the positive side, the lettuces in the garden are growing like weeds. Baby Cos = Caesar salad = yum!

Commentators (including myself) now expect interest rates to stay at current levels for the next 12 months, right through to the end of 2012. This can be attributed to the ongoing saga in Europe and in the US. So floating rates look like they won’t move. Maybe. Maybe not. In Australia ANZ has just moved to separate any move in its floating mortgage rate from changes to the Official Cash Rate. Going forward, they will review their floating mortgage rate each month, and the rate will increase or decrease based on whatever the bank decides. The only thing that will keep them in check is "competition" and public scrutiny. ANZ rationalises that the OCR is no longer a fair reflection on their cost of funds.

So the implication for you is that although the OCR might not change this year, floating mortgage rates could still increase if bank funding costs increase. Could that happen? Yes. Funding costs are already increasing, but not enough to impact mortgage rates just yet. Recently we saw NZ banks get a rating downgrade from AA to AA-. This will have only had a minor impact on funding costs. However, a further downgrade would have a significant impact on funding costs to the tune of 0.30%-0.50%. Although not expected, if Europe went seriously feral, it would be extremely difficult for banks to raise funds offshore and the cost of this money would increase. Add to that a further credit downgrade for Australasian banks, and the picture would suddenly not look so rosy. However, I’m a self diagnosed restless, schizophrenic optimist. My personalities are in the most part optimistic but one of them, Roger, is a complete pessimist. Roger usually visits on Sunday mornings when I'm hungover and vulnerable. He reckons Australia’s run of growth based on shipping raw resources to China has always felt a bit too boom/bust for his confused state. He has a point. Luckily, increasing funding costs is only one side of the equation.

Banks have been making record profits. Surely, it would not be unreasonable to expect banks to absorb any increase in funding costs. Yeah right! Not when bonuses are up for grabs. (Just being honest.) Actually, maybe our banks will have to contain costs. NZ’s mortgage debt is a staggering $173 billion, but only growing at 1.2% per year. The total market grew by $2 billion last year and Kiwi Bank grew its mortgage book by around $1 billion of that. That doesn’t leave a lot of growth for the rest of the industry to fight over and it makes it very easy for banks to go backwards.

ANZ National has lost about 4% market share (equivalent to $7 billion of lending) in the past 6 years. Over the past 2 years even ASB (traditionally the growth bank) has also lost a bit of market share. With the first phase of the credit crisis behind us, there is more emphasis on market share and customer retention and more intense competition amongst the banks to preserve what they have. Hooray for competition. In this market I’d encourage you to negotiate on your existing business, not just on new mortgages.

Talk to a Mortgage Adviser/Broker to see what is available across the market. It’s also an opportune time to make sure you don’t have all of your lending with one bank and the risk that this exposes you to. The great thing about Mortgage Brokers is that they deal with a large number of lenders. The good ones can look at your strategy more holistically reduce your bank exposure risk, and they’ll know the best deals available in the market at any given time. Everyone’s situation is different and your situation will influence the rates that can be negotiated. In general, investors should be getting floating rates of 5.50% or lower. When it comes to fixed rates, we are now getting 2 year fixed rates as low as 5.49% and 3-year and 4-year rates below 5.95%. These rates are fairly fluid (and could increase) but are nonetheless well below advertised rates.