ASB has announced it is raising long term fixed mortgage rates.
This comes after markets moved wholesale swap rates higher in response to expectations that the US Fed’s first rate hike in a decade is not the last.
ASB’s moves involve both their specials – for terms three to five years – and their standard rates for four and five years.
The increases flow through to their BankDirect and Soverign brands as well.
But rates at the shorter end are unchanged at this time.
The three year ‘special’ has been hiked by +26 bps to 4.75% from 4.49%.
The four year ‘special’ has been hiked by +20 bps to 5.15% from 4.95%.
And their five year ‘special’ has been hiked by +16 bps to 5.25% from 5.09%.
Similar hikes to standard rates for these terms have also been announced. So ASB now has the opportunity to ease back on its ‘specials’ without changing standard rates in the future, effectively pushing through another hike again.
These rises have nothing to do with the RBNZ’s recent OCR change – it was a cut after all – and everything to do with rises in wholesale swap rates.
Wholesale swap rates started moving higher at the end of November (when the three year swap reached a low of 2.78%) until Thursday (when the same 3 year rate reached 2.97%. That is a rise of +20 bps. Ironically, these same rates have slipped a little in the latest trading, but the trend higher underpins ASB’s move.
All this shift higher relates to the cost of money in the future as signaled by the US Fed.
At the same time, the risk premium has risen. The unusualness of the policy change is raising uncertainty. The only way we really have to watch this is to follow the Australasian CDS spreads for 5 year investment grade bonds. That is not an exact match, but the best proxy we have. And that shows widening spreads (that is, investors want fatter premiums to lend to banks). At the end of November, this index was sitting at 109 having already risen from 99 at the beginning of November. By last Thursday it was sitting at 113. That isn’t a huge change although inside this short time-frame it will have been noticed by banks.
If wholesale rates continue to trend up over the holiday break, it is certain other banks will follow ASB. If not, they may be forced into a retreat.
But don’t be surprised if in fact this move heralds a general steepening of the rate curve.
The era of very low long term rates are under threat.
Still, there is still time to lock in some very good deals if you think the story about rising rates is persuasive. Of course, no-one really knows, not even the banks (and certainly not me). But borrowers will need to make their own assessments
We would expect most of the main banks will use the holiday period to make similar adjustments as ASB, perhaps with the exception of ANZ who already have fat rates for longer term durations.
The real mortgage competition however is for the shorter terms: two years or so. And while these rates have risen at the wholesale level, the pressure up has been modest to date. Keep watching our data for early signals. Shifts up of more than 20 bps is when you will see banks having to ‘respond’ to maintain margin.
The new floating mortgage rates now compare across all banks as follows:
|below 80% LVR||Floating||1 yr||18mth||2 yrs||3 yrs||5 yrs|
In addition, BNZ has a fixed seven year rate of 5.75%, while TSB Bank offers a fixed ten year rate also at 5.75%.