Take Five: Our biggest bank has cut its mortgage rate, what’s going on?

Attention turned to ANZ on Tuesday when it made a surprise move on one of its home loan rates.

While we have grown accustomed to being told that banks are adjusting their mortgage rates upwards, ANZ’s move went in the opposite direction.

It cut its special two-year fixed mortgage rate from 5.8% to 5.45%. If you have a $500,000 loan over 25 years, that works out to about $50 a fortnight.

Why did this happen? I thought the prices were going up?

Rates have increased significantly in recent months. The Reserve Bank, like other central banks around the world, attempts to calm inflation by increasing the official exchange rate.

At the same time, the cost of many offshore finance that New Zealand banks rely on to lend has also increased.

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But in recent weeks, some of that wholesale funding has fallen slightly, which may have given ANZ enough breathing room to cut its retail interest rate.

Even though banks are currently quite limited in the amount they can lend for a range of reasons, including loan-to-value restrictions, they still compete fiercely for market share.

With BNZ and Kiwibank both offering repayment deals (thousands of dollars offered as an incentive to borrowers taking out new loans), this could also be seen as a way for ANZ to fly the flag for its home loan deals.

Does this mean that we are at the top of the cycle? Not much further for rates to increase from here?

Whether you think mortgage interest rates need to rise further from here depends a bit on how successful you think central banks have been in fighting inflation.

According to ANZ economist Miles Workman, interest rates have priced in increases in the official exchange rate to a high of over 4%. But some economists, including those at ANZ, only think the OCR will need to peak above 3.5% to bring inflation down to a level the Reserve Bank is comfortable with.

This would imply that some of the longer-term rates are already around the top, and short-term rates might not have much room to maneuver. “The Reserve Bank may not need to raise as much as expected and the pressure on mortgage rates may become a little less intense,” Workman said.

ANZ cut its special two-year rate at a time when everyone was resigned to rising mortgage rates.

Asanka Ratnayake/Getty Images

ANZ cut its special two-year rate at a time when everyone was resigned to rising mortgage rates.

Infometrics chief forecaster Gareth Kiernan said he expects to see more two-year rate hikes still to come, particularly if inflation remains at higher levels.

“However, the four- and five-year rates look a bit overcooked, depending on which bank you’re looking at, so they shouldn’t go much higher, even if they don’t start to come down significantly for another nine to- 12 months.”

Should I delay fixing my loan, then?

For now, you will still pay a premium to float your loan. The big banks charge between 5.85% and 5.94% for floating, compared to 5.35% for a one-year fixed rate. That means you would pay around $80 a fortnight more to float rather than take a short-term fix. It might be worth it if there was any indication that rates were about to fall, but Kiernan says it’s hard to make that argument right now.

“Especially when it goes up another 50 basis points next week when the Reserve Bank raises the OCR again. If you can peg for a year at 5.35% or two years at around 5.7% (depending on the bank), I don’t see how it would be better to float. Reserve Bank data shows that 88% of mortgages are currently at fixed rates.

How much do interest rates matter, anyway?

If you recently bought a first home and have a large mortgage, you could face a fairly large increase in interest charges at the end of its fixed term. If you have a $600,000 loan pegged at 2.3% and are now going to re-peg it at 5% on a loan with a 25-year term, you will be paying around $400 more every fortnight.

Over the life of your loan, however, it’s the rate at which you repay your loan rather than the interest rate you pay that will make the biggest difference. If you can make extra payments regularly, you can significantly reduce the term of your loan and save a lot of money. If you had that $600,000 with a rate of 5%, it would cost you $1,618 per fortnight, but if you could increase that amount to $1,700, you would save two years over the total term of your mortgage.

Do they affect real estate prices?

Interest rates have a big impact on the housing market because they affect how much people can afford to pay. If your borrowing capacity is reduced by higher interest rates, you may be limited in the price you can offer for a property.

Dominick Stephens, chief economic adviser to the Treasury, said his team had improved its modeling to give interest rates more weight when predicting the direction house prices could take, as rates extremely recent lows had more influence on price increases than had been predicted.

Economists say that at present, however, the main factor supporting house prices is the labor market. With unemployment so low, few people are forced to sell their homes at a low price. We are therefore witnessing an impasse between buyers and sellers rather than a fall in prices.

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