The average two-year bank mortgage rate could exceed the average bank variable rate

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Something that has only happened twice in the past 20 years may be about to happen again.

The average interest rate of two-year mortgage rates from popular banks may increase more than the average floating mortgage rate from banks. As the graph below shows, since 2002, this has happened twice before, between 2009 and 2012 and then briefly in 2013-2014.

Charts from Interest.co.nz show the average bank floating mortgage rate at 5.05% and the average two-year bank mortgage rate at 4.812%. The three-year average rate is almost neck and neck with the variable rate, at 5.048%. The average rate over one year is 4.074%. (Note, since this article was written both BSA and Westpac increased fixed-term mortgage rates).

In general, New Zealand mortgage borrowers prefer fixed-term loans to variable-rate loans, as shown in the second chart below. Reserve Bank data on fixed versus floating rates dates back to 1998. The only period since then when the market share of floating rates was greater than the share of fixed rates coincides with the time when the two-year average rate was above the average variable rate.

The latest Reserve Bank figures show that in February only $40.138 billion, or 12%, of $334.055 billion in mortgages were floating. In contrast, $293.917 billion, or 88%, was fixed term. Among fixed mortgages, at $73.511 billion, the largest portion was fixed between one and two years. An additional $68.762 billion has been set between six months and a year.

If two-year rates push above floating rates and stay there for a while, will we see borrowers switch to floating mortgage rates in large numbers?

The backdrop to all of this is rising inflation and rising interest rates. The steady increases in bank mortgage rates come at a time when wholesale interest rates, such as swap rates, are steadily rising and the Reserve Bank is raising the official exchange rate (OCR). The OCR is now at 1.50% after being at just 0.25% as recently as October last year.

BNZ senior interest rate strategist Nick Smyth on Wednesday underlined how significant recent global interest rate hikes have been, with the 10-year US Treasury rate jumping 115 basis points in just six weeks. Smyth pointed out this type of movement had only happened twice before in the last 30 years, with an increase of 115 basis points comparable to the average annual 10-year rate trading range over the past 20 years.

Inflation is at decades highs in many countries, including New Zealand, where the March quarter consumer price index to be released on Thursday is should show annual inflation above 7%.

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