The Herald has put together a good run down on what the different experts are saying is the best use of the extra $18-odd dollars a week. Their recommendation? Pay down debt. You can check out the article here.

That seems pretty sensible to us. We’re keen to know about what the Fundit community is going to do - pay down debt? Save more? Buy a new TV? Leave your answer in the comments below.

“Some 87 per cent of Kiwis have two or more products with their bank - one of the highest penetration rates in the region.

Some 60 per cent have maintained their relationship with their main bank for more than 10 years - but only 36 per cent would recommend their main bank to a friend or colleague, results showed.”

http://www.stuff.co.nz/business/personal-finance/4091439/Kiwis-hunting-for-insurance-and-bank-bargains

The situation may be changing though, with a growing number of New Zealanders getting their financial services fix from more than one provider

“The survey indicated 47 per cent of customers have more than one product outside of their main bank, and 55 per cent outside of their main insurer.”

Even though we’re reasonably loyal, we’re not always feeling appreciated by our bank. Why don’t we search around for better deals? Unsurprisingly, the explanation appears to be simply apathy and inertia - the perception that switching banks or products will be difficult, expensive and time consuming.

Here at Fundit we like to think we’re helping to solve that problem, by making it easy to compare mortgage offerings from six different mortgage lenders. Indeed Chris de Wit, banking partner at Deloitte, agrees that technology will help to break down the perceived barriers to switching banks:

“As technology changes and customers move more towards faceless contact with their main bank, the customer apathy demonstrated through this survey could result in increased customer churn.”

It’s only by shopping around that you’ll get the best deal, which in turn drives banks towards greater competition. At the moment they’re sitting pretty, knowing you’re not going anywhere.

Economic uncertainty, oh how I missed you. Just when I thought myself free of your roguish charms, there you are, in from the cold, glorious, triumphant. Double dip? I’m not even sure Mr Whippy does that anymore, and in any case their chocolate tastes like cardboard.

What a couple of weeks. Talk of double dips, deflation, inflation and South Canterbury is making my head spin. What does it all mean?

One of the more important implications as far as mortgage rates go is what will happen with the OCR. The Reserve Bank was, up until two weeks ago, fairly confident in repeating that its outlined plan of slow OCR increases was continuing, regardless of the increasing economic uncertainty. The consensus of market commentators is that this is no longer tenable, and that planned rises in September and potentially beyond will have to be delayed.

“Four out of five bank economists have pulled back their Official Cash Rate (OCR) expectations with a pause now expected in September as a result of uncertainty in the global outlook and a string of weaker than expected domestic data.”

http://www.mortgagerates.co.nz/article/976497216/no-ocr-hike-expected-till-december.html

Some (such as the New Zealand Institute of Economic Research) are going further, arguing that the pause will continue until March 2011:

“The Reserve Bank will pause in raising interest rates until March 2011 given near term growth risks and distant inflationary pressures”

“Principal economist Shamubeel Eaqub says interest rates for households and businesses are much higher than the Official Cash Rate (OCR) or wholesale interest rates which is strangling the recovery with little growth in borrowing.”

http://www.mortgagerates.co.nz/article/976497229/nzier-pause-in-ocr-till-march-2011.html

In any case, this has caused the market consensus opinion of future interest rates to adjust to take into account the new, lower expected future interest rates.

This has been compounded by reductions in international long-term wholesale borrowing costs, as an inducement for people to borrow in less certain times.

What does this mean for mortgage rates?

Longer-term rates have come down, as would be expected given the new market consensus of an early end to the Reserve Bank’s OCR-raising plans and increasing international uncertainty.

Breakeven (Implied Future Interest Rate) Table

Read about what this is, and how to use it, in my first post

Falls in the longer-term rates have probably got a lot of you thinking about fixing now, but remember the market has already ‘priced in’ its consensus opinion about what will happen to floating rates between now and then.

Any changes in this caused by shifting sentiments in the interim are inaccessible to your average retail borrower.

From the banks

BNZ (http://bnz.co.nz/binaries/w260810.pdf):

“No-one on the planet has a reliable model which tells us what is likely to happen with business and consumer willingness to spend, borrow, hire etc. and their tolerance of interest rates and desire to get debt down coming out of a near depression scenario.”

Unfortunately, economists’ models are rather unreliable even in the best of times Of course predicted outcomes from models are a matter of probabilities, it’s just that the things which cause the less probable outcomes (economic shocks) are themselves unpredictable.

Most importantly for you and your mortgage:

“borrowers probably still have time on their side to float before jumping into fixed”

NZX also has a good round-up of the banks’ views (http://www.nzx.com/news/4073429/Banks-at-odds-over-fixed-v-floating-rates)

“Economists are divided as to whether mortgage holders on floating rates should start moving off now or hold off until the end of the year.”

I’ve said it a few times, and I’ll say it again: the fix/float decision is always finely balanced - if it were obvious what to do everyone would do it, and in so doing would change interest rates which would eliminate any advantage from that action. Forget any idea of beating the market, if you can’t afford to gamble on an outcome you’ll only gain marginally from at best you should be prudent and fix.

The effects of the Reserve Bank’s 25 basis point OCR increase have filtered through to mortgage rates, with all major retail banks adjusting their rates in the past week or so. Those of you who read my predictions in the immediate aftermath of the OCR rise will of course want to know how I performed. Ahem. Well, it seems that although I was accurate in my view that longer-term rates would fall slightly, I was incorrect when guessing that the banks wouldn’t pass on the full 0.25% OCR increase to floating rates. As it turns out, they did. The appropriate punishment has been administered, and I promise not to be so careless again.

Actually, this illustrates all too well a point I will be making time and time again: the views of market commentators (one of which I am not, for the record) should be taken with a massive dose of salt. If a view about future interest rates is prevalent it will already be factored into current interest rates – it’s only things that are unexpected that will change economic variables in unpredictable ways. The unfortunate thing about unexpected economic changes is that they tend to be, well, unexpected (at least to the majority of us); which makes predicting them rather difficult.

That little diversion aside, here’s where interest rates are at now (12 August 2010):

Breakeven (Implied Future Interest Rate) Table

Read about what this is, and how to use it, in my first post

Falls in the longer-term rates have probably got a lot of you thinking about fixing now, but remember the market has already ‘priced in’ its consensus opinion about what will happen to floating rates between now and then.

OCR? Margins?

I received a few emails in the wake of my last post asking about the OCR and its relationship to bank margins. For the sake of everyone, here’s a brief explanation for why bank margins haven’t necessarily increased despite there being a bigger difference between the OCR and mortgage rates now than a couple of years ago.

The OCR only applies to the amounts banks hold in overnight settlement accounts with the Reserve Bank. It’s thus a strong determinant of the total supply of money in the economy (and ultimately the retail interest rate you end up paying), but is far from the only factor banks have to consider when setting mortgage rates.

Banks source the majority of their funding from both domestic and international sources, for which they have to pay commercial rates. These rates are typically well above the OCR rate. As a result it isn’t really as simple as subtracting the OCR from a mortgage rate to work out the bank’s margin, because they’re paying more than the OCR for most of their funding.

Why are the commercial rates that banks pay higher than the OCR? It’s a question of risk: rates like the OCR can be considered a loose proxy for a ‘risk-free interest rate’, so any difference between the OCR and a retail mortgage rate isn’t necessarily all gravy for a bank, because they have to expect some defaults. If the difference between the OCR and current mortgage rates is bigger than it once was it probably indicates that the banks expect more defaults, which reduces their ultimate profit margin.

From the banks

BNZ (http://bnz.co.nz/binaries/w050810.pdf):

“But we still see the economy growing near 3.5% next year with increasing capacity issues due to low business capital spending and the labour market tightening we anticipate over the coming 18 months. That means we think the markets are underestimating future official cash rate rises and in fact the current levels of swap rates imply a peak for the cash rate under 4%.”

Tony Alexander thus thinks the consensus market view on future interest rates (shown in the breakeven table above) are a little off. He also mentions that falling long-term rates could induce people to jump off floating and into fixed rates, pushing up those rates as demand increases:

“Eventually a large number of people are likely to jump into fixed and when that happens the risk is the volume of movement causes a spike up in those fixed lending rates. That transition is not imminent but may happen early next year. For myself I would still hop off floating into a two or three year fixed rate.”

Why? Because he thinks the current longer-term rates are underpriced relative to his expectation of OCR and interest rate rises.

Westpac (http://westpac.co.nz/olcontent/olcontent.nsf/content/FM_Weekly_20100809/$FILE/NZWC0908.pdf?Open):

“The decision to fix or float remains finely balanced. Floating rates remain lower than short-term fixed rates at the moment, but they are likely to rise faster as the RBNZ increases the OCR. Fixing, if even for a short term, has the advantage of greater certainty around cash flows, at a time when floating rates could be rising rapidly”

Of course I argue that the fix/float decision is always finely balanced - if it were obvious what to do everyone would do it, and in so doing would change interest rates which would eliminate any advantage from that action. That aside, they speak only truth when talking about certainty: this is the real decision you’re making when deciding to fix or float. Forget any idea of beating the market, if you can’t afford to gamble on an outcome you’ll only gain marginally from at best you should be prudent and fix.

]]> http://blog.fundit.co.nz/2010/08/12/mortgage-update-august-12-2010/feed/ http://blog.fundit.co.nz/2010/07/30/weekly-mortgage-update-july-30-2010/ http://blog.fundit.co.nz/2010/07/30/weekly-mortgage-update-july-30-2010/#comments Fri, 30 Jul 2010 00:48:14 +0000 admin http://blog.fundit.co.nz/?p=205 Welcome to the latest installment of a weekly feature here on the Fundit blog, where I review the bank’s regular economic reports, and, along with my own views, presenting the relevant points in an easy-to-read format. I welcome your questions and comments – feel free to send them through to glenn@fundit.co.nz

Interest Rate Outlook

The Reserve Bank yesterday released its July update, upping the OCR from 2.75% to 3.00%.

Currency market fluctuations aside, this didn’t have much of an impact – continued increases in the OCR have been foreshadowed by the Reserve Bank for a while now, and having been anticipated by the market these increases had already been ‘priced in’ to longer-term rates.

Historically, the average amount over the OCR that banks have charged as a floating rate has been around 2%. The advent of the global financial crisis caused this to balloon somewhat – since January 2009, the average differential between the OCR and floating mortgage rates has been well over 3.5%. In saying this we can observe a definite downward trend in recent months, indicating lenders are requiring less of a risk premium over and above their own cost of funding, which in turn points to a more favourable outlook from banks about the ability of their borrowers to repay loans. Improving consumer sentiment could be one of the many factors behind this.

What does this mean for you? Assuming the downward trend in OCR/floating rate differential continues (a big assumption it must be said) expect floating rates to increase marginally, probably to around 6.10%, over the next few weeks. Fixed-term rates already included an expected rise in the OCR, so I wouldn’t anticipate much movement on that front – although following the Reserve Bank’s lead many commentators have flagged a higher probability of a more gradual OCR rise, which could see longer-term fixed rates decrease slightly. Incidentally, this is why even after an OCR increase you wouldn’t be in a better position now if you’d decided to fix last week: the market interest rates for fixed rate mortgages already included an expected rise in the OCR.

There is one complicating factor worth mentioning, which is the impact that international wholesale rates have on our fixed mortgage rates. Substantial falls in wholesale rates have seen fixed rates fall over the last few months, which could continue if uncertainty persists.

Breakeven (Implied Future Interest Rate) Table

Read last week’s post for an explanation of what this is, and how to use it.

No change on this front, as expected – it’s going to take a while for interest rate changes to propagate through the system. Of note is the two year fixed rate: if you fixed for one year now at 6.46%, you’d need one year rates to rise by 1% over the next year to be worse off than just fixing for two years now at 6.99%. Do you think this will happen? If not, the current two year rate would seem to be expensive.

From the Banks

ANZ have released their latest Property Update at http://anz.co.nz/commercial-institutional/economic-markets-research/property-focus/ (a good read), which includes the following:

“While floating rates have increased, fixed rates have fallen substantially in the past month, led by the long end. This has seen the difference between fixed and floating rates contract substantially. This raises the obvious question – is it worth fixing now that fixed rates have come down? With so much uncertainty about, especially in relation to the state of the housing market, we still favour the much lower floating rates.”

ANZ also goes on to validate much of what I wrote last week about when you should choose to fix or float (which is refreshing!), though they do complicate the issue by introducing the concept of a ‘liquidity’ or ‘term’ premium.

Just to further validate what I wrote last time, BNZ takes a different tack in Tony Alexander’s weekly update (http://bnz.co.nz/About_Us/1,1184,3-29-319.html?tid=PHPTonyAlexander):

“Our analysis still falls slightly in favour of fixing two or three years rather than floating. So personally I would fix three years expecting that by April next year the floating rate will be above the current three year fixed rate of 7.3%. The floating rate will probably be above the current two year fixed rate of 6.99% come March next year.”

Clearly ANZ and BNZ think different things, as will everyone else in the market – their aggregate views form the market expectations of interest rates. Thus the real question again becomes apparent when choosing to fix or float: do you think you’re correct about future interest rates, or the market?

]]> http://blog.fundit.co.nz/2010/07/30/weekly-mortgage-update-july-30-2010/feed/ http://blog.fundit.co.nz/2010/07/23/mortgage-update/ http://blog.fundit.co.nz/2010/07/23/mortgage-update/#comments Fri, 23 Jul 2010 08:09:31 +0000 admin http://blog.fundit.co.nz/?p=193 Welcome to the first installment of a new weekly feature here on the Fundit blog, where I’ll be reviewing the bank’s regular economic reports, and, along with my own views, presenting the relevant points in an easy-to-read format.  I welcome your questions and comments – feel free to send them through to glenn@fundit.co.nz

Fix or Float?

With interest rates expected to rise over the short term many people are wondering if they should fix their mortgage for a longer term now, or keep it at a floating or short fixed term rate. In order to answer this question we essentially have to predict the future, so it’s worth seeing what information is around to base our decision on!

A good place to start is with current interest rates. Financial markets aren’t blind to what could happen in the future – indeed, current interest rates always reflect what the market thinks will happen to interest rates in the years ahead. With a few calculations we can therefore work out what the market currently thinks will happen to interest rates in the future. Below is a table (which I’ll be updating weekly), similar to that seen in ANZ’s monthly “Property Focus” report, telling us what the market thinks:

Some people will at this point be somewhat curious as to how the numbers in this table are generated – for a primer have a look at http://en.wikipedia.org/wiki/Yield_curve (scroll down to “Market expectations (pure expectations) hypothesis”).

As an example, imagine you’re thinking of borrowing money in two years time, and at that time you want to borrow for 18 months. Consulting our table, we see that right now the market thinks the interest rate will be 7.99% - this is the market’s current best guess of what the interest rate for an 18 month loan will be in two years time.

For another example (a little more complex, but stay with me), imagine that I want to borrow for two years. There are a number of ways I could go about doing this:

1. I could borrow for a 2 year term today at a fixed rate of 6.99%,
2. I could borrow for a 1 year term today at a fixed rate of 6.46%, then at the end of that 1 year borrow again for another year at whatever the fixed rate is,
3. I could borrow for 6 months today at a fixed rate of 6.09%, then borrow again after that loan ends for another 18 months at whatever the 18 month fixed rate is…

You get the idea.

Imagine I decide to proceed with option 2 above, borrowing for a one year term at 6.46% and then when that year is up borrowing for another year (for a total of two years borrowing). According to the table above, the market is guessing that one year from today the interest rate on a one year fixed mortgage will be 7.52%.

This result, although seemingly magical at first glance, derives from a simple principle: I really shouldn’t care which of the three funding options above I choose. It should cost me the same amount overall to borrow for 6 months and then 18 months, or to just borrow for 2 years up front, or to borrow for one year and then another year. If it were cheaper to borrow for 2 years up front, everybody would do just that – driving that interest rate up and eliminating any cost savings in the process.

This all seems a bit neat and tidy for the real world, and alas, it is. In reality, I would only be indifferent between funding options if the interest rate in the future actually was what the market guesses it will be today. But this almost never happens: if you could reliably predict interest rates you would be a very wealthy person indeed!

So what use is our table if it’s probably a poor reflection of reality? Well, even if you can’t predict interest rates with any precision, economists believe they can pick a range of probable interest rates with some accuracy. This implication is important, because (so the theory goes) we can use these predictions to get you a cheaper mortgage.

As an example (last one, I promise), imagine I have a mortgage and am trying to choose between

1. fixing for two years at 6.99%, or
2. fixing for 6 months at 6.09% and then for another 18 months at whatever the available rate is.

Suppose I choose the second option: what interest rate do I want to see in 6 months time to make this option cheaper than just fixing for two years up front? Consulting the above table, the maximum interest rate I want to see in 6 months (for an 18 month term) is 7.28%. If the interest rate in 6 months is above 7.28% it would have been cheaper for me to just borrow at 6.99% in the first place.

The real question then becomes apparent: do I think interest rates in six months for an 18 month fixed mortgage will be above or below 7.28%? If I think below, I should borrow for six months then 18 months. If I think above, I should fix for the longer two year term now. This is the question you should be asking yourself when choosing whether to fix or float: do you think rates will rise faster or slower than the amount in the above table? Who is right – you or the market?

What do the banks think?

Now that we’ve got a framework for making decisions let’s canvas the banks to see what they have to say. Turning first to the circumspect BNZ (http://bnz.co.nz/binaries/w150710.pdf):

“The RB would have to pause in their tightening cycle for a year to make one worse off fixing two or three years than floating at the moment. So I’d veer marginally toward fixing (probably three years) but most people won’t. That is because fixing at the moment involves locking in a rate well above current floating rates, and many people don’t believe the RB will keep raising rates in light of weak data.”

ANZ is more certain, although their last update was over a month ago (http://anz.co.nz/resources/1/f/1f62778042c59aa6a881a993a00affdf/PropertyFocus-20100806.pdf):

“Our broad preference for floating is based mainly on our view that interest rates will not rise as quickly as what is “implied” by the term structure of mortgage rates.”

ANZ, then, believes that the market is wrong and that the future interest rates in our table above are too high.

Finally, let’s look at Kiwibank (http://www.kiwibank.co.nz/personal-banking/home-loans/market-update.asp):

“we expect official interest rates to increase by about half a percentage point by the end of 2010.”

“Given the fragility of the global recovery (in particular in Europe), a concerted and immediate move to substantially higher rates is unlikely. The current and projected profile of mortgage interest rates suggests it would need a significantly large increase in floating rates in a year’s time for those longer-term fixed rates to yield an overall advantage.”

The author of Kiwibank’s market update, Dr Ganesh Nana, also offers the best advice of all:

“Above all else, it is wise to remain calm and not be panicked into making decisions.”

With Generation C having easier and faster access to shop around for traditional banking products, using news sites like Interest.co.nz or automated services like Fundit.co.nz; the article asks the question ‘Could a reversal be in the wings? Where mortgage brokers—and online services like Fundit.co.nz—are the brand that ‘owns’ the customer relationships, and the banks themselves are just commodities?’

Fundit is featured alongside many prominent business’s and successful business men - Fundit’s  message to the banking industry? “Prepare for the future instead of risking becoming just another commercial dinosaur. If you’re trying to maintain the status quo you’ll be caught off guard when change happens.”

Read the full article here

Sir Eion said today (Thursday February 4) he was “humbled” to be recognised as the Ryman Healthcare Senior New Zealander of the Year in a national awards ceremony.

Sir Eion, 65, speaking following the Auckland gala awards presentation on Wednesday night, won the award for his lifetime of philanthropic service.

“It was an amazing night because it recognised a great variety of people across all sectors of the community, and I was proud to be amongst those,”  he said.

Sir Eion said there were many other people who “did a lot of good” who were not always recognised for their work.

“Hopefully this award will alert people to the fact that they can get a lot of pleasure out of helping organisations, as I do.”

Sir Eion said he was looking forward to spending more time working with Queenstown Resort College, of which he is chairman and founder . He is also involved with a full range of education, youth, health, community trusts and financial organisations of which he is either chairman, trustee or board member as well as pioneering IT projects such as the Fundit mortgage auction platform .

As part of his award, Sir Eion received a $5,000 donation towards his work from principal sponsor Kiwibank.

“I haven’t decided what I’m going to do with the money as yet, but it may be going to Diabetes Research or something in Queenstown. I certainly will be spending it and probably adding to it because I’ve already made some serious commitments to helping out organisations such as the Wakatipu Trails Trust.”

Queenstown Resort College CEO Charlie Phillips said if Sir Eion’s contribution to the college was anything to measure him by, then he thoroughly deserved the award.

“The faith, financial support and personal involvement he has demonstrated for such a pioneering enterprise as QRC has been amazing, and to do this in such a positive and proactive way is something you can’t help but admire.

“Without Sir Eion, QRC and many other enterprises would not exist, meaning New Zealand is a better place with him in it.”

Sir Eion’s support of new ventures is focussed on projects which, in particular,  provide benefits to a wide range of people - for instance he sees the Fundit mortgage auction platform as providing  “a real win win for everyone, borrowers and lenders alike- it is a highly efficient and effective tool for both lenders sourcing loan business and for borrowers surveying the market for the best deal.”  Sir Eion believes that, technologically, at least, this platform is a world leader and is capable of being exported to other jurisdictions. While not all New Zealand banks are yet on board, he believes it should be  “a no brainer for them, once they get over the fear of being exposed to open and transparent competition and realise there are real benefits.” “BNZ and  Kiwibank, traditionally the two most competitive lenders, have no problem with that, so it is expected that the others will come to the same point, hopefully sooner rather than later, so that the full benefits can be realised by both lenders and borrowers in this market.”  he said.

FUNDIT SUPPORTS DIABETES RESEARCH AND THE L.A.M TRUST.

Fundit supports Diabetes Research through the Edgar National Centre for Diabetes Research ( see www.otago.ac.nz/diabetes/about.html) which was established as part of the University of Otago Advancement Campaign and officially opened its doors on the 12th November 2003.  The purpose of the ENCDR is to promote collaborative research amongst those involved in diabetes-related research in departments in the University of Otago, and to facilitate collaboration where appropriate with researchers and health care providers throughout New Zealand and internationally. The research conducted at the centre involves a range of disciplines, including nutrition, epidemiology, health services research, Māori health, biostatistics, public health, microbiology, genetics and biochemistry.

The research aims to reduce the incidence of diabetes and its complications by finding new ways to prevent and manage diabetes. The key objectives are:

• to undertake excellent research in the field of diabetes
• to promote and facilitate national and international collaboration amongst researchers in the field of diabetes
• to assist and participate in guideline and policy development at local, national and international levels
• to share diabetes knowledge and skills at community, teaching and professional levels
• to develop cultural competencies in the field of diabetes research.

Fundit also supports the LAM Trust of New Zealand (see www.lam.org.nz/index.html).

Established in Auckland in 1999, the New Zealand LAM Trust is one of a number of patient and family organisations around the world working alongside scientists, clinicians and researchers, raising awareness about the disease Lymphangioleiomyomatosis  (LAM) which is a rare, progressive and often fatal lung disease that strikes young women in the prime of their lives causing symptoms which include shortness of breath, chest pain, cough and lung collapse. and helping raise funds to support research into its cause and ultimately its cure.

THE CHALLENGE

• To help to transform the vision of a future without LAM into a reality
• To intensify our efforts to raise funds for scientific research
• To educate general practitioners to recognise early symptoms of LAM
• To identify and provide support for every LAM patient in New Zealand.

OBJECTIVES

• To provide support for persons diagnosed with LAM and their families
• To become the source of information for persons affected with LAM
• To publish educational materials on LAM for all interested individuals
• To raise awareness of LAM, to improve early detection and diagnosis
• To maintain a database of persons throughout the country who have LAM
• To foster and fund research aimed at finding a cause of and cure for LAM and ultimately, preventative measures
• To sponsor conferences, workshops and scientific meetings related to LAM
• To raise money to support the goals.

With support for New Zealand women suffering from LAM and fundraising for research as the central focus, the New Zealand LAM Trust is committed to the above challenges.

Fundit believes that the broker model for both mortgages and financial advice generally is deeply flawed - in particular, as they receive different commissions from different lenders/borrowers/issuers of shares securities. Any incentive for them to propose loan or investment offers other than from those who pay them the highest commission (or no commission at all, as in the case of BNZ mortgages) is largely absent. The proposed commission disclosure regime is unworkable, as it is largely impossible for users to make a practical and meaningful comparison of offers net of commission.

The Fundit model provides a level playing field for all lender participants and the same commission rates (which are substantially less than those of Brokers). It is completely open and transparent and allows users to very simply compare offers on an apples for apple basis. We say it does more for consumer protection than any form of regulation