Link between mortgage rates changes
Recent changes in mortgage rates mean we could be heading towards a negative yield curve again, possibly by the end of the year.
Wednesday, March 29th 2000, 12:00AM
by Paul McBeth
Recent changes in mortgage rates mean we could be heading towards a negative yield curve again, possibly by the end of the year.
That's when long-term interest rates are below short-term rates, a situation that was last the case some 18 months ago. And if you're a borrower on a floating rate, that means you could be looking longingly at some of the fixed rate terms as your own mortgage costs start heading upwards.
So what's happening to mortgage rates at the moment and what's the outlook?
- There's no doubt that the yield curve has already flattened or, in other words, the gap between short and long term rates has got smaller. Six months ago, banks' floating mortgage rates were 6.50 per cent and five-year rates 8.80 per cent: they're now 8.10 per cent and 8.95-9.00 per cent respectively.
- Floating and short-term rates have already risen this year in line with Reserve Bank rises in its Official Cash Rate, which went up from 5 per cent to 5.25 per cent in January and again to 5.75 per cent mid March. Deutsche Bank's opinion (reinforced by Monday's release of December quarter GDP data, which showed much stronger economic growth than anyone expected) is that the OCR will go to 6 per cent in mid April and to 6.50 per cent in mid May. So, more increases ahead for those mortgage rates.
- How far? Floating rates close to 10 per cent by mid 2001 is what some say, with predictions that they'll reach nine per cent by the end of this year and peak mid next year.
- Meanwhile, longer term rates could keep easing back. They've already edged back in recent weeks: for example, many lenders have pinned back their five-year fixed rates from around 9.10 per cent to 8.95 per cent following falls in wholesale interest rates. These rates are more influenced by trends in overseas bond markets than local goings-on.
The result of all that: longer-term rates end up cheaper than short-term and you have a negative yield curve. ASB Bank economist Rozanna Wozniak says that will probably happen at some stage next year, maybe even later this year.
"The flattening yield curve is exactly what you'd expect to see as the Reserve Bank tightens monetary policy. The long rates pre-empt (and we saw that last year), the short ones follow and the whole thing flattens."
For borrowers, she says that's a return to more normal cycles as there have been long periods when fixed rates were cheaper than floating.
"And the further we get in to the environment where lower inflation is entrenched, the width of those cycles is becoming narrower."
She says we should be able to have, on average over a whole cycle, mortgage rates of around eight per cent.