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Why home loan rates aren’t ‘anywhere near high enough’
There is unlikely to be a change in the official cash rate this week, but that doesn’t mean borrowers are not in for interest rate increases, commentators say.
The Reserve Bank will review the official cash rate on Wednesday but is widely forecast to leave it on hold, while signalling that it will rise more quickly than previously expected through the latter half of this year.
For home loan borrowers, it is likely to mean increases through the rest of the year.
Two-year special rates have risen from a trough of 4.5 percent towards the end of last year to about 5.2 percent.
Buying, refixing or just holding on? Here’s what you need to know about the property market
But Koura Wealth founder Rupert Carlyon said they had not gone “anywhere near high enough” based on recent movements in wholesale rates.
Since early March, the two-year swap rate has lifted about 70 basis points but advertised two-year home loan rates only lifted by about 20 basis points.
“Swap rates have gone up by almost 100 basis points, 1 percent, over the last six months. Mortgage rates have gone nowhere near that. So that means that banks are wearing lower margins, which we also know the New Zealand banks do not like to do for very long.”
He said it meant there would be some “pretty hefty rate rises” coming for mortgages. “Even absent the OCR rises.”
Squirrel chief executive David Cunningham said when two-year fixed rates were around 4.5 percent the swap rate was 2.6 percent.
“At 3.5 percent swap rate that would imply a 5.4 percent two-year rate. Most banks are around 5.2 percent or 5.3 percent. So yes, there is a little upside. That said, term investment and savings account rates aren’t up so much, so that may contain fixed lending around around their current level. I’d pick about 5.3 percent is where they will settle for now.”
Koura Wealth founder Rupert Carlyon expects “pretty hefty rate rises” for mortgages. Photo: Unsplash/ Jakub Żerdzicki
Mike Jones, chief economist at BNZ, agreed there was upward pressure on retail rates.
“But wholesale interest rates have yo-yoing about more than normal recently making it harder to discern trend from noise. Not only is there plenty of debate and uncertainty about how the Reserve Bank will respond to the fallout from the Middle Eastern conflict, but global bond markets have been very skittish as well. For example, we saw the local one-year wholesale or swap rate spike up to 3.28 percent last week, but it’s since fallen back to 3.15 percent.
“I think the short-term outlook for both wholesale and retail rates rests on what the Reserve Bank does and says … Particularly their guidance and forecasts for the rest of the year. That’s going to be worth tuning into.
“Our view is that retail interest rates are likely to remain in a gradual uptrend, having turned a corner late last year. But it’s worth pointing out that fixed mortgage rates may not have a whole lot more to rise this year because an expectation of three Reserve Bank rate hikes has already been built into market rates as they stand. So only floating rates would be expected to increase much, should those hikes be delivered. It’s also interesting that mortgage borrowers have been getting ahead of the curve to some degree by increasing the average terms they are fixing for. Two-year fixed terms are back to being the favourite. Those borrowers will therefore be less exposed initially to any further rate increases from here.”
ANZ economists noted that the market had priced in 25 percent odds that there would be an increase this week, and forecast the OCR getting to more than 3.6 percent, faster and higher than the ANZ or Reserve Bank expected.
They said if the Reserve Bank’s update was in line with ANZ expectations, short-term rates could correct lower in response.
Kiwibank chief economist Jarrod Kerr said if the Reserve Bank increased rates three times this year, as some were suggesting, some of that would be passed on. Photo: Supplied / Gino Demeer
Jarrod Kerr, chief economist at Kiwibank, said global rates shot higher about a week ago, which had exacerbated the movements in wholesale markets here.
“There’s been this shift in expectations for the Reserve Bank. You’ve got a number of local banks calling for hikes as early as July. But even looking at their rather hawkish view, the market’s gone well beyond that. And there’s quite a bit of illiquidity in the swap market at times. So that’s kind of pushing the moves a little further.
“It’s beyond expectations of what most bank economists expect will happen. So we’re sort of seeing that move in the markets as being a little bit exaggerated. I don’t think anyone’s expecting a cash rate of 3.25 percent by the end of the year, but the market’s sort of flirting with that idea. And then we’ve got, you know, 3.6ish priced in from this time next year. I don’t think, you know, any economist is anywhere near that.”
He said if the Reserve Bank increased rates three times this year, as some people were suggesting, some of that would be passed on.
“I don’t see mortgage rates falling. The obvious path is higher, not lower. That’s the risk that households need to have in their minds.”
People are starting to fix their home loans for longer terms, and Ker said significantly more was going into two and even three-year fixes.
“People make good decisions when it comes to that sort of stuff. Unfortunately, now the whole mortgage rate curve is significantly higher than where it was six months ago.”
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The chief executive of the Parliamentary Service is confident there will be enough room to accommodate the increased number of MPs and their staff coming into Parliament.
On current numbers, up to 131 MPs could be sitting in the Chamber following the election, brought on by a record overhang result.
Clerk of the House of Representatives Dr David Wilson told the Spinoff that currently the debating chamber had enough chairs to seat 124 MPs – including the Speaker of the House – and work was being done to accommodate more by altering the seating arrangement.
In a statement, Parliamentary Service chief executive Rafael Gonzalez-Montero said planning for a larger Parliament had been going for “some time”.
“Now that the election results have confirmed an increase to the number of members we are looking at several options.
“We are confident we will be able to accommodate all members within the Chamber.”
VNP / Phil Smith
Gonzalez-Montero said office accommodation for members and their staff would be “stretched” for a short time, but the new Members’ Building was only a few months away from “practical completion”.
That building – located behind Parliament – was due to be ready to occupy in April next year and had capacity to accommodate around 30 backbench MPs.
“All members should be in fit-for-purpose accommodation from that point,” Gonzalez-Montero said.
Following the 2023 election, 123 MPs sat in the Chamber – a record number at the time. That decreased to 122 following the resignation of National MP Judith Collins.
Collins held the seat of Papakura and stepped down in May and Parliament voted against holding a by-election because it was too close to the election.
The election result also meant high-ranking National Party MPs like Chris Bishop, Paul Goldsmith, Nicola Willis and Gerry Brownlee – Speaker of the House and an MP for 30 years – would likely not make it back into Parliament.
Only resigning or retiring MPs were permitted to give a valedictory speech meaning none of them would get the chance to give a valedictory statement.
Asked if their would be special allowances for valedictories, Wilson said in a statement that normally only MPs were allowed to speak in the House but the House could suspend its own rules or temporarily alter them.
“It could do so to allow former members to address the House.”
Wilson said no such arrangements could be made until the next Parliament opened and members sworn in.
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