Why are fixed mortgage rates still rising?

Fixed mortgage rates are now well into the 7% range, and borrowers have a bit longer to wait before they see these rates start to fall, a leading economist says.

Following announcements from Westpac and ANZ, Kiwibank recently announced increases to its fixed mortgage rates, and it has also confirmed increases to its term deposit rates.

In a media release issued on October 18, a summary of rates shows that Kiwibank’s previous six-month special mortgage rate of 7.25% would end, while its special and standard mortgage rates for one year to five years would increase.

Kiwibank chief economist Jarrod Kerr (pictured above) told NZ Adviser that wholesale markets had moved substantially: the yield on the US 10-year bond, which serves as the global benchmark for mortgage rates, has moved from as low as 3.40% to around 4.80%, he said.

Correspondingly, all fixed income rates have lifted over that period and it points to high inflation remaining an issue, which is why central banks are communicating the message that they will keep wholesale cash rates “higher for longer”, Kerr said.

In some cases, one or two more rate hikes may be required, while in others, it may be a story of maintaining the cash rate where it is for a longer period.

“Thoughts of rate cuts have been pushed out, there’s still chances of rate hikes and that really has lifted the term structure (curves) around the world, and means that our wholesale funding is more expensive,” Kerr said.

The official cash rate, currently 5.5%, has increased by 525 basis points since October 2021, but has remained on hold since May. According to Kiwibank’s forecast, the official cash rate has now peaked, while ANZ is now forecasting a further rate hike in February, taking it to 5.75%.

Kiwibank’s standard one-year fixed rate now sits at 8.25%, and it’s special one-year rate (minimum 20% equity) is 7.25%. Its two-year fixed rates are 8.05% and 7.05% respectively, and it’s three-year fixed rates are 7.79% and 6.89%. It’s four-year and five-year fixed rates (standard and special) are 7.69% and 6.79%.

The bank’s variable and offset rate, which as with other banks, more closely reflects movements in the official cash rate, is unchanged at 8.50%.

Increases to fixed mortgage rates have been widespread, with Westpac and BNZ among the banks to announce increases to their fixed rates in September.

Acknowledging that increases to fixed rates was not positive for borrowers, Kerr said that term deposit rates had risen beyond the last official cash rate hike in May, Kiwibank’s current six-month term deposit rate sitting at 6.05%.

Kerr said that deposits represent the “lion’s share” of bank funding, and rates have moved in line with competition, with the recent increases from Kiwibank  a sign the bank was fighting to “get money in the door” to lend out.

Decrease to fixed mortgage rates in sight

Despite higher funding costs impacting fixed mortgage rates, Kerr said that Kiwibank continued to hold the view that long-term funding costs would ease, giving rise to some relief in fixed mortgage rates.

Since September quarter inflation data was released, which showed an annual drop to 5.6%, Kerr confirmed that wholesale rates had come off a little.

“We saw the pricing for the November RBNZ meeting was pretty much 50/50, and then it dropped to about 25% (7 basis points) which was a decent reaction,” Kerr said. “Further out the curve, we saw the two-year rate fall about 13 basis points on the day.”

While the drop could be considered minor for borrowers, Kerr said that this was an indication of lower rates to come.

“We’re thinking that come next year, these wholesale rates will start shifting south rather than continuing to push north,” he said.

Noting that the exact timing of lower fixed rates was difficult to pick, Kerr said that currently, wholesale traders and fund managers remained hesitant on the idea that interest rates would go lower.

“There’s a bit of a reluctance from investors to place bets on lower rates at the moment … I think they need a bit more confidence and data to prove that thesis, but I think we’ll get that,” Kerr said.

In early 2024, Kerr said that he expected central banks to recognise that they’d done enough in the way of hikes, with their attention turning towards how long they’d need to hold the cash rate at the current level before the first cut.

“That will start to come through next year but it is unfortunately a story for 2024,” Kerr said.

Kiwibank is still forecasting the cash rate peak at 5.5% and off the back of the drop in annual inflation over the September quarter, suggests the first rate cut could be as early as May.

If this forecast is correct, Kerr said that wholesale rates would have to adjust lower to meet that view, resulting in lower fixed mortgage rates.

Is the current level of interest rates a deterrent for borrowers? Share your thoughts in the comments section below.