If mortgage charges begin shifting up, maybe it’s best to take into consideration locking in a number of the present low charges for longer than your present contract. We overview the problems that you must take into consideration
Readers of our Swap Rate Charts will have noticed some big changes in the last week, especially the surprisingly big ones Q1-2021 GDP result was published.
This week, one-year swap rates rose +8 basis points to their highest level since April 2020.
This week, the two-year swap rates rose +16 basis points to their highest level since March 2020.
Given that rising longer-term swap / bond rates here have already resulted in rising offers for longer-term fixed-rate mortgage rates, it seems reasonable to wonder whether these new increases in short-term swap rates do the same for 1- and 2-year homes become lending rates.
This is important for many people because 34% of all fixed-rate mortgage rates are renewed within the next six months plus another 37% from six to twelve months.
(Much has been said in reports on other higher percentage intelligence services, but it will not be as high as these as the floating rate percentage is unlikely to matter. Borrowers using revolving loans are far less vulnerable to interest rates interest levels or changes because they are disciplined borrowers who use this tool cleverly and understand the benefits. Other SMB or micro borrowers using a variable mortgage to fund a business’s working capital need the same flexibility. And homeowners who assigned a small part of their obligations to a variable interest rate, so that they have the opportunity to make opportunistic repayments, and will not deviate from this advantage, so that the variable rate part is already at its probable minimum level.)
The RBNZ has also forecast an OCR of 2% within 4 years (see Fig.2.17) and to get there they would likely have to start gradually increasing the current 0.25% level from early 2022. Banking economists are diverging in their estimates from when this will start, but from Q1-2022 it seems likely.
If you think mortgage rates will rise from here, is this a good time to think about holding on longer and holding on to today’s low rates?
Certainly in a market with rising interest rates is the issue of Break fees is not on the table. Banks can’t charge much more than an administration fee if you break a lower interest rate contract to switch to a longer, higher interest rate contract. Individual circumstances may influence this, but usually it will.
One reason to do this is to fix longer-term rates (3, 4 or 5 years fixed) now, as the short-term rates can rise quite sharply over the next twelve months before your existing fixed-price contract is renewed. The situation may be that if you wait to act, you may face higher rates.
Currently a two-year fixed interest rate of 2.55% to 2.59% at the big banks. A 5-year fixed interest rate at approx. 3.69%, about +110 bps more.
If you extend your existing loan, what are the chances that either a 2.55% interest rate for two years or an interest rate of 3.69% for five years will apply?
The swap rates have to rise by around +100 basis points (+1%) in order to be just “even”. If you think they will keep going up, you should probably consider switching.
The current prices are unusually low. Regulators are looking for ways to “normalize” (even if the QE drug makes it difficult). Since the GFC, “normal” could be closer to 5% for a two-year rate, and closer to 6.5% for a five-year rate. However, you could easily say that we are not going back to the “old normal” and you might be right. Someone else might suggest that markets (and regulators) have a tendency to overshoot, so the risks of future change are up. In the end it’s your call – nobody really knows.,
However, if you are unsure of what lies ahead, you can choose a certainty (for up to five years) at a relatively low cost. Such decisions are usually less about mathematical calculations and more about your risk tolerance and uncertainty. However, if you are running your personal mortgage such a computer, the added repayment burden could lead you to go for “certainty”. In addition to the risk, you always have an offer with a 2.55% interest rate to choose from.
Although it will take a few more years, an OCR of 2% will likely add at least 1.75% to short-term interest rates (perhaps an annual rate would go from 2.19% to almost 4%, others above it and to almost 5%). Prices for longer terms are not only influenced by the political framework of the RBNZ, but also by international influencing factors, which makes it even more difficult to forecast them.
It is probably a good time to dust off your existing fixed rate mortgage contract and come up with some numbers. Here is our fully functional mortgage calculator This allows you to compare two scenarios. Here is our break allowance calculator.
The existing very low mortgage rates may no longer exist if markets hike short-term wholesale rates in concert. (And it’s still an “if,” though it seems more likely at the moment.)
Uncertainties on the way down aren’t really tied to potential penalties that can hurt. Doing uncertainties on the way up. The only thing to deal with them is that if you decide to change, the break fees are low.
There is much more to such a decision than arithmetic or just reading the economic tea leaves. It is best to seek professional advice from a qualified and registered independent source who can help you properly assess your own financial situation. (This column is not that.)