Kim Mundy ASB Economist

Mortgage rates have risen across the curve since the ASB November’s Home Loan Rate Report.

NZ interest rates are generally affected by a combination of the RBNZ’s Official Cash Rate (OCR), offshore interest rates and banks’ funding environments. While the OCR has remained at a record low, offshore interest rates (especially in the US) have lifted by more than we expected.

At the same time, deposit growth has slowed relative to lending growth. As a result, not only are banks competing to attract and retain deposits (putting a floor under interest rates), banks are having to finance this funding gap in relatively more expensive offshore markets. Despite this, mortgage rates remain low relative to historical averages and current “specials” are even lower for most term rates.

We expect the RBNZ to leave the OCR on hold until late 2018. As the OCR is one factor influencing floating and shorter-term fixed mortgage rates, we are not likely to see the floating mortgage rate and short-term fixed rates decline any further this year.

Further, higher funding costs and increasing global interest rates could see further (but modest) upward pressure on shorter-term interest rates. Upward pressure on longer-term mortgage rates is likely to be slightly more pronounced.

Longer-term rates are more heavily influenced by offshore developments, particularly in the US. US interest rates responded strongly to Donald Trump’s proposed policies and have risen sharply in the months following his election to the US Presidency. This has flowed through to New Zealand long-term interest rates. We expect US rates to remain elevated, and as a result, expect to see further upward movement over time in NZ’s 3- to 5-year fixed mortgage rates.

The RBNZ’s LVR lending restrictions and borrowers The RBNZ introduced a third round of LVR restrictions on 1 October 2016. Nationwide, investors are now required to have a 40% deposit and owneroccupiers (O-Os) are required to have a 20% deposit. Only 10% of O-Os loans can be permitted with a deposit of less than 20%. As a result, the practice of offering “specials” or lower rates on lending with equity in excess of the LVR restrictions is likely to remain in place.

Borrowers should monitor these “specials”, and discuss the options with their mortgage providers when deciding what to do with their mortgage. Identifying the best strategy Personal preferences for certainty and flexibility are also important when choosing a mortgage.

Source ASB Home loan report 2017