Rather than our standard interest rate update, this week we thought we’d take a step back, and look at the bigger picture of what’s been happening with swap rates and bank margins in recent weeks.
In simple terms, bank margins are the difference between “swap” or wholesale interest rates (what the banks borrow money at) and the fixed-term mortgage rates they offer customers.
Most of the time, bank margins sit between 1.5% and 1.8%—but at the moment, they’ve ballooned to a massive 2.2% (on average) for the one-year term.
Now, fixed mortgage rates have remained relatively stable over the past few weeks, with one-year fixed rates settling at around 6.29% in the wake of the Reserve Bank’s latest rate cut on 14th August.
So, what’s causing those margins to expand is the fact that swap rates have been tracking steadily downwards lately, with the one-year swap rate now sitting around 4.00%.
The catalyst for change will be our next Official Cash Rate announcement on 9th October—which looks increasingly likely to bring a 0.50% reduction
Assuming things play out in line with expectations, we should see one-year fixed rates fall to around 5.85%, bringing that margin back closer to 1.8%. This should drive a bit more competition amongst the banks.
Beyond that, it will be interesting to see whether the Reserve Bank’s (RBNZ) outlook on interest rates for the next few months has changed.
Should the RBNZ signal an intention to drop rates faster than initially anticipated—front-loading its planned reductions into the first half of 2025—the market’s response could see some of those longer-term swap rates fall significantly.
If that’s the case, within the next couple of months, we could start to see three-year fixed-term rates around 4.95%, which is starting to look like a good option.
It’s a bold call at the moment, but of course, we’ll know more as events unfold over the next month or so.
So, how long should borrowers be fixing for in this environment?
Right now, the advice would be to either roll onto, or settle on, a floating rate. Do this for the next month or two until after our last two OCR announcements of the year—which will allow you to take advantage of further rate cuts as soon as possible.
Once we see one-year rates below 6%, this will become a really attractive option for borrowers.
And then, once longer-term rates drop below 5%, potentially within the next two to three months, it would be worth considering fixing for a longer term if you want to improve your cash flow and are pragmatic. That’s getting closer to where mortgage rates are expected to settle in the long run once we’ve got back to the RBNZ’s “neutral” OCR of around 3%.
For now, though, it’s just a matter of watching and waiting to see what the Reserve Bank has in store for us on 9th October.
Check in again next week for our latest update on interest rates.
