Mortgage Rates | The low down on what's up

For years now I've ranted and raved about mortgage rates. One of the reoccurring themes is that mortgage rates are strongly influenced by household behaviour - "fear." This is most evident when households believe that rates are about to rise and so rush out and fix. We saw this in 2009 and we are likely to see it again now, or soon. In my opinion the only driver of increasing wholesale swap rates has been some borrowers starting to take advantage of very low long term fixed mortgage rates. Swap rates are the rates that banks fund at. They are a leading indicator of what will happen to mortgage rates. At Squirrel we've been fixing more and more clients over the past 2-3 months at 2 year rates as low as 5.39% and 4 year rates as low as 5.95%. This trickle across the market has started to nudge wholesale rates up. Recent commentary in the media and from Westpac is likely to see more households trying to fix and pushing the wholesale rates up higher still. The trickle is becoming a stream. To date only the wholesale rates have been increasing. We have not seen the advertised mortgage rates change yet, because bank margins are so fat they have been able to absorb it. However, margins are contracting and it wont be long before we see an increase in carded fixed rates. If advertised rates start to increase the stream may become a river.

This is the tail wagging the dog!

It follows that if you scare people into fixing, then fixed rates will increase. For every fixed mortgage there needs to be a depositor/investor on the other side of that. At the low rates currently on offer there are simply not enough depositors prepared to fix at low rates for long-terms.  With this lack of supply, if everyone tries to fix, then rates go up. The best example of this was in early 2009 when mortgage rates jumped about 1.00% in the space of a month.

What to do

First thing - take a chill pill. As a country we are too preoccupied with mortgage rates, almost neurotic.  I've always advocated splitting the mortgage and fixing half, floating half. Have a bet both ways and then go do something more exciting and forget about the mortgage. My view of the world hasn't changed. We're in a slow long recovery. The US keeps looking for good news (its election year) and Europe is still a mess. Closer to home Aussie isn't looking sharp and China is an enigma. This GFC hasn't felt too bad in NZ because we're a slow growth economy. Look at the fundamentals. As much as we'd like to, the world cannot conveniently bury its problems. The big de-leverage from borrowing too much will take a decade to unwind and we've got our baby boomers going into some sort of semi-retirement which will dampen retail spending. To me this all means 5-10 years of historically low interest rates. We all eventually expect to see the OCR (and therefore floating rates) increase by 0.50% but that looks someway off. I guess what I'm saying is that the story hasn't changed, so whatever your mortgage strategy is, stick with it. For all of the housing activity, I don't think it has a strong backbone and won't take much to ease off. If you are contemplating selling your house, then I'd be on to it pronto whilst it is still a seller's market. I'm not sure the underlying demand is there to cope with a surge in listings. If you're on a Floating Rate of 5.25% or lower then there is no rush to jump into a fixed rate. You'll likely perform better with what you've got. If you are on a Floating Rate of 5.75% then I'd say a 2 year fixed at 5.50% or 3 year fixed rate at 5.90% looks very attractive. We had been getting 4 year rates at 5.95% but I think that's gone now.

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