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No hurry to fix after OCR announcement

Those with floating rate mortgages needn't be in any hurry to move to a fixed rate after Reserve Bank governor Alan Bollard left interest rates unchanged and signalled any increases will be much less than projected even three months ago.

Thursday, December 9th 2010, 10:03AM 8 Comments

by Jenny Ruth

Bollard left his official cash rate (OCR) unchanged at 3% and said while it is likely to rise modestly over the next two years, he won't be moving it "until the recovery becomes more robust and underlying inflationary pressures show more obvious signs of increasing."

Bollard specifically referred to weak household spending, weakening housing market activity and the prospect house prices "may decline a little further in the near term," dashing hopes raised by Quotable Value's suggestion earlier this week that house prices may be stabilising.

"The main thing the Reserve Bank is responding to is weaker than expected activity through the middle six months of this year," says Brendan O'Donovan, chief economist at Westpac.

"They've pushed out the next rate hike to be in quarter three 2011 rather than quarter one," O'Donovan says.

Right throughout the forecast period, the central bank has lowered its interest rate expectations by about 30 to 40 basis points, he says.

"The Reserve Bank is forecasting a recovery still and they're anticipating better consumption and investment but they want to see it before they respond to it."

Bollard also said current low rates are having less of a stimulatory effect than in the past.

"The big change is how the Reserve Bank is viewing the effectiveness of interest rates," says Nick Tuffley, chief economist at ASB Bank.

While once a neutral OCR rate, neither stimulating nor impeding the economy, was regarded as about 6.5%, now its probably about 4.5% and even at current low levels the stimulatory effect is a lot less than previously thought, Tuffley says.

"Therefore there's no rush in lifting (the OCR) right now. They can leave rates on hold for longer." Tuffley says the next OCR rise may be in June or July next year.

Robin Clements at UBS New Zealand says Bollard has still made it clear he will be lifting the OCR at some stage but the tone is definitely more dovish than previously.

"Now, the emphasis is on keeping rates low until the economy is stronger."

« No interest rate rise for ChristmasBNZ's mortgage book grew at twice its market share »

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Comments from our readers

On 10 December 2010 at 7:18 am dave said:
Of course the banks will want people to keep floating while they can attract a margin of over 3.25% over the OCR. The only ones winning at the moment are the bank's with their excessive margins. The only thing the RBNZ has done is confirm the banks can be greedy while expecting everyone to tighten their belts.
I bet we will not see any economist(most are on the banks payrolls anyway)advocating a DROP in floating and short term rates as there is no need to "factor in" any increases for the next 3-6 months.
On 11 December 2010 at 1:56 pm John said:
Hi Dave, as you say the banks are making good margins off floating rates at present and borrowers (been typical New Zealanders) want the cheapest rate available today so are happy to oblige them. People need to appreciate though that the OCR no longer has the overriding sway on interest rates it used to rather the Reserve Bank’s new core funding ratio rules introduced for NZ banks mean that capital requirements will dictate significantly what a particular bank can offer its home loan customers interest rate wise. As these new rules ramp up a notch again in April 2011 banks here will be chasing depositors so interest rates will be rising regardless of what is happening to the OCR at the time. One of the newer banks (without mentioning names) is struggling with these new capital holding requirements already and is now passing on some of these associated costs to its home loan customers in the form of fees/low equity premiums. This will become more and more an issue next year for customers as they look to get off floating rates or want to lock in a new rate as far out from maturity as possible from their current fixed agreement.
On 14 December 2010 at 7:37 am dave said:
Fair comment John but sounding like a paid bank employee or reliant on their support.I would have thought that the capital requirements would not include "on call" products such as credit balances in non interest bearing accounts etc. Also borrowing in the short term surely would be based upon OCR etc. We were told a few weeks ago it is the "swap rate" that effects the 2-3 yr rates most significantly yet the banks are also enjoying margins in excess of 3% on these over the past year.One of the major reasons banks have not been able to attract deposit funds was the Govt. Deposit Guarantee Scheme(and have we all not paid for the greediness of the investor on that account)which has noe effectively lapsed so banks should be able to attract investments at lower rates rather than competing with the guarantee
On 14 December 2010 at 11:23 am John said:
Hi Dave. I'm a mortgage broker so have no particular love for the banks or the margins they continue to make off borrowers despite these tough economic times! What I am hearing from the banks themselves in private is that the new core funding ratio rules introduced by the Reserve Bank will impact on borrowers over time and that people need to appreciate that the OCR isn't always going to hold the sway on interest rates that it used to. As I mentioned one bank is already passing on associated costs with the new capital holding rules to its home loan customers in the form of excessive low equity premiums to what others are offering in the market. It shouldn't take too much detective work to figure out which bank I am talking about.
On 19 December 2010 at 12:38 pm B Hanson said:
Why the pussyfooting over naming banks? Are the thought police about?
On 20 December 2010 at 1:47 pm John said:
Ok B Hanson I'll attempt to name the bank in question on here. We’ll see if this gets posted or not. This is going to be the banking story of the year for 2011 for the journalist that has the conviction to get this information into the public spotlight.

The lender in question currently passing on significant costs to its home loan customers in the form of both excessive low equity premiums and fees to hold interest rates in advance of existing home loans maturing is Kiwibank.

Example : Couple paying $650,000 for a home in Auckland and borrowing 95% of the purchase price i.e. a mortgage of $617,500. The Low Equity Premium that Kiwibank will charge a customer at this level of borrowing is 4.18% of the loan amount i.e. $25,811! ASB Bank is now back to lending up to 95% for select customers and with the above scenario its low equity premium would (only) be $6,175 i.e. 1% of the loan amount being borrowed. This begs the question then of why there is such a massive difference on cost between Kiwibank & ASB Bank on this transaction???

Kiwibank is also making it existing home loan clients pay fees (non refundable) to lock in interest rates in advance of their home loans maturing i.e. if you had a home loan at Kiwibank that was due to mature on the 20th Feb 2011 and you wanted to lock in a rate now with $200,000 fixed for 2 years and $100,000 fixed for 3 years it would cost you $250 per loan portion i.e. $500 in total + another $100 per each loan to action the refix i.e. $200. Total cost to rate lock and refix would thus be $700!! NO other bank in New Zealand charges these kind of refix fees to existing home loan customers! Typically other banks will charge a customer nothing to refix and reserve a rate in advance of maturity nowadays.

As interest rates move upwards next year (eventually) more and more borrowers will want to start to lock in interest rates as far out from maturity as possible with their bank. If they happen to bank with Kiwibank they will find some unexpected costs popping up.

I should mention also that the above low equity premiums & refix fees also apply to AMP Home Loan and NZ Home Loan customers as both these organisations use the Kiwibank Home Loan product.
On 20 December 2010 at 3:04 pm Alistair said:
So how can Kiwibank still say they are the cheapest bank then over the first 6 years of a mortgage? They promote their 6 year home loan guarantee at every opportunity they get to entice new customers but clearly this guarantee is not worth the paper it is printed on!
On 20 December 2010 at 4:06 pm John said:
Might be time for the Commerce Commission take a look at the wording of Kiwibank's home loan guarantee then? The Securities Commission seems to have woken up from its slumber recently so whose cage do we have to rattle at the Commerce Commission to get them to do their job?
Commenting is closed

 

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Mortgage Rates Table

Full Rates Table | Compare Rates

Lender Flt 1yr 2yr 3yr
AIA - Back My Build 4.94 - - -
AIA - Go Home Loans 7.49 ▼5.79 ▼5.49 ▼5.59
ANZ 7.39 6.39 6.19 6.19
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
ANZ Special - 5.79 5.59 5.59
ASB Bank 7.39 ▼5.79 ▼5.49 ▼5.59
ASB Better Homes Top Up - - - 1.00
Avanti Finance ▼7.90 - - -
Basecorp Finance ▼8.35 - - -
BNZ - Classic - 5.99 5.69 5.69
Lender Flt 1yr 2yr 3yr
BNZ - Mortgage One 7.54 - - -
BNZ - Rapid Repay 7.54 - - -
BNZ - Std 7.44 ▼5.79 ▼5.59 5.69
BNZ - TotalMoney 7.54 - - -
CFML 321 Loans 6.20 - - -
CFML Home Loans 6.45 - - -
CFML Prime Loans 8.25 - - -
CFML Standard Loans 9.20 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - 5.69 - -
Lender Flt 1yr 2yr 3yr
Co-operative Bank - Owner Occ 6.95 5.79 5.59 5.69
Co-operative Bank - Standard 6.95 6.29 6.09 6.19
Credit Union Auckland 7.70 - - -
First Credit Union Special - ▼5.99 ▼5.89 -
First Credit Union Standard ▼7.69 ▼6.69 ▼6.39 -
Heartland Bank - Online 6.99 ▼5.49 ▼5.39 ▼5.45
Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society 8.60 6.65 6.40 -
ICBC 7.49 ▼5.79 ▼5.59 5.59
Kainga Ora 8.39 7.05 6.59 6.49
Kainga Ora - First Home Buyer Special - - - -
Lender Flt 1yr 2yr 3yr
Kiwibank 7.25 6.89 6.59 6.49
Kiwibank - Offset 7.25 - - -
Kiwibank Special 7.25 5.99 5.69 5.69
Liberty 8.59 8.69 8.79 8.94
Nelson Building Society 7.94 ▼5.75 ▼5.99 -
Pepper Money Advantage 10.49 - - -
Pepper Money Easy 8.69 - - -
Pepper Money Essential 8.29 - - -
SBS Bank 7.49 6.95 6.29 6.29
SBS Bank Special - 6.15 5.69 5.69
SBS Construction lending for FHB - - - -
Lender Flt 1yr 2yr 3yr
SBS FirstHome Combo 4.94 5.15 - -
SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.75 - - -
TSB Bank 8.19 6.49 ▼6.39 ▼6.39
TSB Special ▲8.64 ▲6.74 ▲6.49 ▲6.39
Unity 7.64 ▼5.79 ▼5.55 -
Unity First Home Buyer special - 5.49 - -
Wairarapa Building Society ▼7.70 ▼5.95 ▼5.75 -
Westpac 7.39 6.39 6.09 6.19
Westpac Choices Everyday 7.49 - - -
Westpac Offset 7.39 - - -
Lender Flt 1yr 2yr 3yr
Westpac Special - 5.79 5.49 5.59
Median 7.54 5.99 5.89 5.69

Last updated: 6 December 2024 9:11am

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