ANALYSIS: When the Te Pūtea Matua Reserve Bank raised the official exchange rate (OCR) by 75 basis points on Wednesday, borrowers were told to brace themselves for pain.
Real estate research firm Corelogic has warned that rising mortgage rates could add $12,000 per year to the cost of a $500,000 home loan.
Lifting the OCR is the Reserve Bank’s way of slowing the economy by making borrowing more expensive, driving up the price of mortgages and business loans, and leaving less money in households’ pockets. to spend.
But so far, mortgage rates haven’t really budged. Here’s why.
READ MORE:
* Here’s how banks set mortgage rates
* Kiwibank and BNZ follow other major banks in raising mortgage rates
* ASB and Westpac raise home loan rates after Reserve Bank OCR hike
The first home loan rates to move after an OCR hike are usually variable rate loans.
Often, banks pass on the entire OCR increase soon after the Reserve Bank’s announcement.
For most home borrowers, these are things like revolving credit, and often only represent a small portion of overall household borrowing.
Kathryn George / Stuff
The official exchange rate has now risen nine times in a row. Mortgage rates have risen accordingly.
ANZ’s chief economist, Miles Workman, says bank ‘treasury’ teams are constantly working to find the money each bank needs to make loans.
Sources of bank money include households placing money in savings and other deposits with banks, but also banks borrowing from large investors, such as pension funds, in the international money markets of ” big “.
The bank financing that backs variable rate loans is short-term financing that is very sensitive to OCR increases, Workman says.
This is why floating rates tend to rise within a day or a few days after an OCR spike, he says.
MONIQUE FORD/Stuff
Miles Workman, senior economist at ANZ, says variable rate loans are more sensitive to changes in OCR.
In contrast, longer-term money borrowed in the wholesale markets to secure long-term mortgage rates (one-, two-, three-, four- and five-year fixed-term loans) is less sensitive to movements in the OCR.
Markets “priced in” expected OCR increases before they happened, Workman says.
“Fixed mortgage rates are going to move based on expectations of how OCR will move over the next one, two, three years, or whatever the duration,” he says.
“You don’t necessarily need an OCR to move fixed rates,” he says.
“We may be halfway between two Reserve Bank decisions and then something happens, like the consumer price index data, and that CPI data is extremely strong.”
In the event of a shock like that, he says, “they start pricing future OCR increases higher, or staying higher for longer.
This puts upward pressure on fixed-term mortgage rates.
There are other pressures on mortgage rates. Economist Tony Alexander says economists now expect the OCR to peak at around 5.5%.
This will put pressure on the prices of short-term and fixed-term mortgages, but banks could also choose to increase their margins.
“The one-year fixed mortgage rate appears to be heading toward 6.5%, assuming banks continue to tolerate below-average spreads,” Alexander says.
The rise in fixed-rate mortgages is having the biggest impact on households, as most households secure most of their mortgages.
RYAN ANDERSON/Stuff
According to independent economist Tony Alexander, one-year fixed rates head for 6.5% if banks continue to tolerate “below-average” spreads.
Overall, households (including real estate investors) owed $302 billion secured by mortgages on residential properties at the end of September.
Only $39 billion of that was on variable rate loans.
But households only feel the pain of fixed-term rate increases when one of their fixed-term loans comes due, and they have to reprice at a higher rate.
