Are two year rates a good deal?
Most of the noise and froth in the mortgage market at the moment is around deeply discounted two-year fixed rate but is accepting that rate at the moment the best option for consumers?
Wednesday, December 1st 2004, 6:06AM
by Jenny Ruth
BNZ chief economist Tony Alexander certainly thinks his bank’s 6.9% two-year fixed rate loan is great for consumers.
With BNZ’s floating rate currently at 8.75%, to do better with a floating rate loan over a two-year period, the OCR would have to go back to 5% rather quickly. "To do that in New Zealand, you would almost need a recession," Alexander says.
"We would think that in two years time, the floating rate will still be above 7%."
As well, although many people make the mistake of thinking the main influence on interest rates is the Reserve Bank’s monetary policy, he says.
But global interest rates play a big part too, particularly US rates. While the Federal Reserve has started raising rates, the equivalent of our OCR is still just 2%. "We see that heading back to 4% plus by early 2006," Alexander says.
When BNZ’s current offer runs out on December 17, two-year fixed mortgage rates are likely to rise as banks aim to restore their profit margins, he says. BNZ’s profit margin on its two-year fixed rate is only about 25 basis points, only about a quarter of the normal margin.
Cameron Bagrie, an economist at National Bank, says the wholesale interest rate market is currently pricing in interest rate cuts over 2005 but he doesn’t think that’s likely to happen.
And he agrees with Alexander that global interest rates are going to rise.
"At the moment, it’s all power to the consumer."
Seeing both these economists are employed by major players in the home loans market, you might think, well, they would say that, wouldn’t they.
But Ulf Schoefisch, chief economist at Deutsche Bank, which isn’t in the home loans market, agrees with them. "It would only not be in consumers’ best interests if rates were coming off in the two-year period to a very significant degree," he says.
He thinks two-year rates would be about 7.7% if banks were getting their usual profit margins. Even if a consumer took advantage of ASB Bank’s current 6.95% one-year fixed-rate loan, they would probably be facing higher rates when the one year expired, Schoefisch says.
"Wholesale rates would have to come down by about 75 basis points over the next year to give you a 6.95% option to renew. I think it (the two-year fixed rate) is a super deal at the moment and obviously it won’t last too long now."
While it’s possible that the OCR might drop sufficiently for a consumer to pay the same amount on either a floating rate or one-year fixed rate, that isn’t very likely and would probably require the New Zealand dollar, already very high, to race even higher, he says.
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