David Whitburn

Right now 4 and 5 year fixed rates are over 8%, and that means that they are over their 10 year averages.  With the very steep yield curves from floating below 6% to fixing for 5 years at ~8.5%, I think that their would have to be a very compelling reason to fix for 4 or 5 years right now.  Yes I did fix money for 5 years in March as I blogged about (scroll down) earlier in the year, but that was at 6.50%.  Bet you are glad you followed my advice then!

Check out the yield curve on interest rates below.  I attended another good property seminar run by ANZ’s Mobile Mortgage Managers in my capacity as Vice President of APIA, and they gave me this graph to insert in my blog when I told them I was doing one:

ANZ’s Interest Rates across all terms

Look at the floating and fixed rates below 6%, and how high the 4 and 5 year rates are.   In fact from the 6 month fixed rates all the way up to the 5 year rates you can clearly see how steep the yield curve is.  You are now paying a very real premium for risk.

So if you didn’t, couldn’t or wouldn’t follow my instruction to fix long (for 5 years) back in March, perhaps consider my thoughts to keep to short term 1 year, 6 month or floating rates.  I am a massive fan of revolving credit loans, which when used properly, give you massive flexibility to repay principal and to redraw when you need to (eg. replace that 50 year old leaky roof, and when the right deal approaches to be the deposit on your next property purchase).  Why not consider floating or taking 6 month interest rates (5.29% with Westpac right now, 5.4% with BNZ, 5.45% with ANZ etc) or 1 year rates 6% or lower.

Why I am not taking long term rates right now?

Our Reserve Bank governor stated that he was not going to lift the OCR “until the later part of 2010″.  This gives some certainty that the floating rates will remain low for a period of time to come.   The market for some unknown reason is not believing Dr Bollard and are pricing in around 1.25% worth of hikes to the OCR.  Now with the US economy in such a dire state still, and the NZD:USD at a high level of $0.75, can you really see the Reserve Bank hiking our OCR.  That would murder already struggling exporters.  The new liquidity rules the Reserve Bank has brought in, act to penalise long term borrowings from offshore.  As a result savers for 3 – 5 year fixed rate term deposits are being rewarded with higher interest rates, as it is easier and less expensive to source funds from NZ, as opposed to abroad.  Borrowers are shortening their duration as Reserve Bank statistic show.  Since June 2009 fewer than 10% of all borrowers are fixing for 3 years or longer.  This is actually very interesting as it will mean that the Reserve Bank gets far greater traction when it raises and indeed in the future lowers the OCR, as far more people are on floating rates.

In Australia their are far fewer borrowers fixing, and they traditionally have a significant number on floating rates enjoying the flexibility to pay down principal without incurring break fees, but also lenders compete aggressively over floating rate lending.  In NZ typically the 2 year fixed rate has been the most competitive one, with memorable campaigns by Government owned Kiwibank, and also BNZ with their “unbeatable” campaign.  Nowadays times are changing and I saw in Westpac last week their 5.29% 6 month rate as their “poster rate” on three busy Auckland branches and ANZ and ASB competing on the basis off their floating rate – plastered all over the walls and windows of their branches.  Perhaps this is a good structural change.

Break-even rates

On this basis I believe that with loans coming up for rollover to not take a 3 year or higher rate.  I am not even a fan of 2 year rates right now.  I am now going back to an interest rate averaging strategy but with a good deal of debt expiring in 2014 from my efforts in March this year, I am now looking at some shorter term rates, and am fixing for 6 months at present.  Look at the break-even rates to mean getting a better return.  If I were to fix for 6 months at 6.45%, that the 18 month would have to be 7.5% or higher in April next year, to make the 2 year rate better! And also note that I haven’t even tried to model the increased beneficial effects of repaying more principal down whilst you are benefiting from such a low sub 6% interest rate.

If I wanted to fix for 1 year, I still wouldn’t as fixing for 6 months at 5.45%, would mean for the remaining 6 months at April 2010, the rate would have to be 1% higher at 6.45% of higher.  I just don’t see this happening.  Now do your own reading (I read and thank BNZ, Westpac, ANZ and ASB’s economic commentaries all the time so share some high level of influence from them) and own calculations in deciding what is right for you.  I am going short though!

1,688 Responses to “Interest Rate Strategies”