David Whitburn

Posts Tagged ‘interest rates’

Below is the table of interest rates offered by the major trading banks and Kiwibank:

In the wake of the devastating earthquake where it looks like around 240 New Zealanders and global citizens will have sadly been killed, and many more injured, there is going to be some financial damage too.  Costs are likely to come in at over $10 billion. Fortunately this doesn’t appear that it will be against New Zealand’s Sovereign Credit Rating, nor the big 4 Australian banks (Commonwealth Bank of Australia – owner of ASB, National Australia Bank – owner of BNZ, ANZ – owner of ANZ and National Bank, and Westpac).  This would have been disastrous for Cantabrian home-owners in negative equity situations as a result of the earthquake, and also for home-owners struggling in what looks like a double dip recession (certainly it appears this way when inflation is backed out of the equation too).  This blog acknowledges the devastation on the great people of Canterbury arising from this second massive and larger giant earthquake, but focuses in on the financial impacts for property investors which include:

1. Interest rate changes
2. Insurance premium increases
3. Government policy/tax changes

1) Interest rate changes

Looking at the latest home loan rates at http://www.mortgagerates.co.nz/ you will note that there have been price movements this afternoon.  ANZ and their sister bank National Bank were the first to cut rates reducing one-year rates by 50 basis points, 18-month rates have dropped by 26 points and its two and three-year rates have fallen by 16 and 11 points respectively.  This was followed by cuts to short and medium term interest rates by ASB and their boutique sister bank, Bank Direct, Westpac and TSB Bank. This earthquake is a game changer and all previous predictions are off.  Our GDP forecast for the year was 2.3% now it has been reduced to a tiny 0.3%.  The Canterbury region which Christchurch dominates is responsible for 15% of New Zealand’s GDP. It will struggle to be anywhere like as productive as it should be, and massive Government subsidies will be required. I now predict the OCR will be lowered by 0.50% on 10 March as an emergency measure to return it to its lowest point in 40 years.  This is what the market is predicting anyway, with the flow off into short and medium term interest rates.  Take a look at the following table:

Source: Interest.co.nz - Interest Rates at 1 March 2011

2) Insurance Costs

EQC Levies

Firstly I need to tidy up the misconception that after a natural disaster everyone is entitled to a payout from the Earthquake Commission (“EQC”).  This government body was set up under the Earthquake Commission Act 1993, to provide a natural disaster fund for homeowners and tenants who hold insurance.  The levies are 5 cents (plus GST) for every $100 insured, raised from landlord’s taking out building cover and tenant’s taking out contents cover.  The most you can pay a year for one dwelling and its contents is $67.50 including GST. This will give you the maximum cover of $100,000 (+ GST) for your home and $20,000 (+ GST) for personal belongings. EQC pays the value of  damaged land at the time of the earthquake or natural disaster, or the repair cost, whichever is lower.

Dwellings are covered on a replacement value basis. Personal property is insured on the same basis as the household insurance policy covering the same property.  Some retaining walls are covered, but on an indemnity basis.

Clearly this is going to be a massive claim on the EQC and although costs have not been calculated with claims deadlines for aftershocks to the 4 September 2010 not being closed yet.  It may well be the the EQC war chest is emptied and that the Government needs to borrow funds to top it up.  Going forwards EQC levies are likely to triple and you need to budget for this cost increase.

Insurance Premiums

Private insurers and their re-insurers are going to get hit hard in the pocket.  This is concerning to property investors as insurance costs were already going up in light of GST rises and increased claims in New Zealand as a result of the 4 September 2010 Canterbury earthquake – now general property insurance premiums will be much higher too.

3) Downstream costs from Government Policy

There has been talk by the Minister of Finance Dr Bill English today of removing the middle class tax relief that is Working for Families tax credits; and removing interest-free student loans. This will restore the policy to how I had in the 1990s at Auckland University where I could get my fees and course costs paid with a low interest rate (from memory it was just under the banks floating rates).  If we borrow too much it will put our plan to get to a Government surplus by 2014/15 into jeopardy prejudicing further Government spending or tax cuts.

The US Federal Reserve as expected announced that they would buy an additional $600 billion of US Treasuries, setting a variable pace of around US$75 billion of purchases per month up to June 2011, to extend the rescue package and seek to reduce unemployment and avert deflation.  The US central bank kept its pledge to hold interest rates low for an “extended period.”  Xerox Corporation announced they would be cutting 2,500 jobs around the time of this announcement, so there is a lot of recovery still to be had in the US.

US Federal Reserve to print US$600 billion to counter deflation and raise employment

There has been an impact on currencies markets like this as money printing challenges credibility in the perception of America’s global trading partners and money markets.  In currency terms the US Dollar is unsurprisingly weaker with the ‘Aussie’ going past parity and reaching a 28 year old high of 100 Aussie cents to 100.68 US cents overnight, before closing still stronger than the US Dollar at 1 AUD to 1.0048 USD.

The New Zealand dollar surged to its highest level since 2008 after a government report showed employers added more jobs than economists estimated, boosting expectations for the central bank to raise interest rates.  The Kiwi (NZ Dollar) gained a percent to 78.78 U.S. cents as from 77.99 cents in New York yesterday. It reached 78.86 cents, the most since June 2008.  The kiwi also advanced 1 percent to 63.86 Yen.

Statistics New Zealand said the unemployment rate dropped to a seasonally adjusted 6.4 percent in the third quarter, compared with the median estimate of 6.7 percent in a Bloomberg survey of economists.   This is a good result and has left me unchanged in my prediction that the next OCR rise will be a 0.25% rise in March 2011, and floating rates amongst major trading banks will rise by a similar amount. The NZ two year swap rate which is closely (but by no means perfectly) correlated with the 2 year fixed rate rose to 4.04% last night. So I would consider looking at the 2 and 3 year fixed rates for value right now if you don’t adopt an interest rate averaging strategy.  That said I strongly believe that you should have some money floating is fantastic if you are using a facility like BNZ’s Total Money where you can pool or offset balances, or a revolving credit facility properly.

PS> I have updated my blog on Paul Henry’s inappropriate attacks to include a handwritten thank you letter I received from the Right Honourable Sir Anand Satyanand, our Governor General – thanking me for my comments and support.

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Congratulations to HSBC, the world’s largest bank, who have led the market with some significant rate drops. Already HSBC were the cheapest at the 1, 2, 3 and 5 year fixed terms.  Now they have cut all fixed rates across the Board.  Here are HSBC’s hot new rates:

The 6 month HSBC rate at 4.99% is amazing, with clear daylight until their next closest competitor National Bank at 5.70%.  The 1 year HSBC rate becomes even cheaper at 5.49%, with National Bank and Westpac at 6.15% retail (you can usually negotiate 0.1% off this rate from these two banks by just asking).  The 2 year HSBC rate at 6.49% is well cheaper than BNZ, ANZ and Westpac’s 7.10%, and the 3 year HSBC rate at 7.29% beats the BNZ classic rate of 7.50% (with the other lenders off the pace at 7.70%).  The 4 year HSBC rate at 7.69% and 5 year HSBC rate at 7.99% are not pushed by any main tier lenders.  They average 8.20% for 4 years and 8.50% for 5 years, with Sovereign offering 8.65% to fix for 5 years (although you would probably say no thank you to this rate).  The next best competitors for the 4 year rate are actually the Public Trust at 7.99% fixed for 4 years and AMP Home Loans at 8.10%.

Refinancing

I refinanced away from Sovereign (a second tier lender with comparatively poor interest rates) last week to ANZ.  I got a good $500 contribution towards legal fees to compensate me for the transfer costs, and I will save many hundreds of dollars each and every by not being with Sovereign.  No valuation was required as I could use the CV and I have always been a little bit conservative with debt doing this transaction at 70% of loan to CV (which would be a little bit less than a registered valuation in my case).  ANZ just made things so easy for me.

Many investors do not know that Sovereign pay amongst the very highest rates of commission to mortgage brokers, so it is not totally surprising that many property investors have loans with Sovereign, given the commission cuts and some banks refuse to deal with brokers over the past few years (BNZ, HSBC, Kiwibank to name a few).  Sure Sovereign have a sound product, but they are really not the market leaders with interest rates and they do seem to follow ASB (same parent company – the Commonwealth Bank of Australia) with a premium loaded on!

So perhaps it is time for you to review any loans you have with Sovereign or any second tier, third tier or alternative lenders.  If you are in good financial shape like many investors unknowingly are, then consider refinancing to HSBC Premier, or at least a main tier bank interested in lending.  I am well connected to people in the banking industry and understand that banks are still lending, they are just being picky, and can afford to be.  However different banks have different credit policies at different times.  You want to be the master of your own financial destiny.  If you are not getting the best interest rates and/or loan features that you want, it may be worthwhile considering a change.  Don’t hesitate to contact me on david@davidwhitburn.com if you want some good banking referrals to help strengthen your own portfolio – I am not a broker myself, but a property mentor wanting people to achieve all they can through property investment.

Technical Note – HSBC Premier criteria (at 7 April 2010):

As sourced from HSBC’s website:

• A minimum value of NZD500,000 in home loans with HSBC in New Zealand (facility limit not outstanding balance); and/or
• A minimum value of NZD100,000 in savings and investments with HSBC in New Zealand; and/or
• If you’re an overseas HSBC Premier customer, you’ll automatically qualify for Premier customer status in New Zealand

Note: Once you become a qualified HSBC Premier customer minimum home loan values no longer apply, although other home lending criteria may still need to be met.  Ie. When you buy your $2.5 million Kohimarama dream home in Auckand eastern bays with views of the Rangitoto and the North Shore, and you pay down your mortgage to below $500,000, you are not suddenly excluded from being an HSBC Premier customer and subjected to loaded interest rates (usually 0.5% premium).

You can find out more by calling into an HSBC branch, emailing premier@hsbc.co.nz, or contacting the HSBC Premier Call Centre on 0800 028 088 (within New Zealand) or +64 9 368 8557 (outside New Zealand).

Disclosure of Interest: Related parties of mine that I could hold a beneficial interest in have minuscule shareholdings in HSBC (FTSE UK), and all Australian Banks (CBA, NAB, Westpac, ANZ).

Members should take note that the Reserve Bank today (30 April 2009) reduced New Zealand’s Official Cash Rate (OCR) from 3.0% to 2.5%, with Reserve Bank Governor Alan Bollard commenting:

“Overall, developments since March point to lower medium-term inflation than previously projected. The main factors behind this are weaker global growth, and an unwarranted tightening in financial conditions via both higher long-term interest rates and a stronger exchange rate than expected.  Global financial markets have showed some tentative signs of stabilisation since the March Monetary Policy Statement and governments in the major economies are continuing to make progress in resolving their banking system difficulties. However, a large amount still needs to be done and sentiment remains fragile. Negative feedback from the global recession could also still adversely affect financial institutions. The world economy deteriorated further than expected in the first quarter of 2009. While monetary and fiscal policy responses in many countries have been substantial and there are some signs of stabilisation in some countries, we still expect the adverse economic forces generated by the crisis to remain dominant throughout 2009. The timing and extent of global recovery remain highly uncertain. While the New Zealand economy has not experienced the same extreme falls in economic activity as seen in a number of our trading partners, it remains weak. Business sentiment is low, investment has been curtailed and employment reduced. We expect the large decline in the OCR over the past year to pass through to more borrowers over coming quarters as existing fixed-rate mortgages come up for re-pricing. This, together with the stimulus from fiscal policy, will act to support the New Zealand economy and eventually see activity trough and pick up thereafter. However, the scale of the global financial crisis and domestic adjustments underway are such that it is likely to be some time before economic activity returns to robust and healthy levels.

We consider it appropriate to provide further policy stimulus to the economy. We expect to keep the OCR at or below the current level through until the latter part of 2010. The OCR could still move modestly lower over the coming quarters.”

We have seen numerous cuts since the OCR peak in this interest rate cycle at 8.25% where it stood for a year until 24 July 2008.  This year we have had 2% cut off it alone with the 12 March policy announcement being a 0.5% cut, and the January 29 policy announcement being an unprecedented 1.5% cut.  The encouraging words from Dr Bollard are that there are “more in the pipeline” indicates a far deeper recession than previously contemplated, so like other Central Banks in the world he will try to stimulate the our economy with lower interest rates for business and household lenders.  This will flow onto lower interest rates for investors.  Other Reserve Bank heavyweights Tim Hampton and John McDermott were also present answering questions with Dr Bollard.  Sometime they mentioned which is important to consider is that to be competitive in International Captial Markets we can’t be like the US Federal Reserve, Canadian Reserve Bank and Bank of England who have 0.5% of lower equivalents to the Official Cash Rate.  I am predicting at this early stage only a 0.25% cut in the OCR at the next 6 weekly policy announcement on 11 June 2009, which is also where the 3 monthly Monetary Policy Statement will be presented.

While the New Zealand economy has not experienced the same extreme falls in economic activity as seen in a number of our trading partners, it remains weak. Business sentiment is low, investment has been curtailed and employment reduced. We expect the large decline in the OCR over the past year to pass through to more borrowers over coming quarters as existing fixed-rate mortgages come up for re-pricing. This, together with the stimulus from fiscal policy, will act to support the New Zealand economy and eventually see activity trough and pick up thereafter. However, the scale of the global financial crisis and domestic adjustments underway are such that it is likely to be some time before economic activity returns to robust and healthy levels.
Dr Bollard stated that “we consider it appropriate to provide further policy stimulus to the economy. We expect to keep the OCR at or below the current level through until the latter part of 2010. The OCR could still move modestly lower over the coming quarters.”

We have seen numerous cuts since the OCR peak in this interest rate cycle at 8.25% where it stood for a year until 24 July 2008.  This year we have had 2% cut off it alone with the 12 March policy announcement being a 0.5% cut, and the January 29 policy announcement being an unprecedented 1.5% cut.  The encouraging words from Dr Bollard are that there are “more in the pipeline” indicates a far deeper recession than previously contemplated, so like other Central Banks in the world he will try to stimulate the our economy with lower interest rates for business and household lenders.  This will flow onto lower interest rates for investors.  Other Reserve Bank heavyweights Tim Hampton and John McDermott were also present answering questions with Dr Bollard.  Sometime they mentioned which is important to consider is that to be competitive in International Captial Markets we can’t be like the US Federal Reserve, Canadian Reserve Bank and Bank of England who have 0.5% of lower equivalents to the Official Cash Rate.  I am predicting at this early stage a final 0.25% cut to the OCR in this economic cycle at the next 6 weekly policy announcement on 11 June 2009, which is also when the 3 monthly Monetary Policy Statement will be presented.

Westpac have already slashed 0.4% off their 6 month rate, and I understand all major lenders are reviewing their interest rates today.  The effect of this announcement is likely to pull down the floating, 6 month, 1 year rates, and 2 year fixed term rates and perhaps a trimming to the 3 year rate, as Dr Bollard in an unusual move suggested that the rates would remain low until at least the end of next year.  This strongly implies for the next 18 months that rates will not rise from where they are now.  Expect to see more cuts to the short term fixed rates and floating rates from various lenders today!

What Should I Do About This?
I would encourage all members to review their current loan portfolio and to work out an interest rate and loan strategy with their brokers or bankers.  It will be interesting to watch good sites like http://www.goodreturns.co.nz/mortgage-rates.html to get up to date interest rates, and www.sorted.org.nz to see the reaction to the Reserve Bank’s move to state they expect interest rates to be low until the end of 2010.  This move was possibly learned from the Reserve Bank of Canada where they found a way to impact longer term fixed rates (which Dr Bollard is frustrated by them rising).  In an unorthodox move they stated that they would not raise the OCR until at least the 2nd quarter of 2010.  We have implied no rise in the OCR at least from current levels until the end of 2010.  Watch and hope for medium term interest rates to fall with this significant level of certainty.

Interest costs are typically the greatest expense for property investors, so I look forward to hearing from the Deputy Reserve Bank Governor Dr John McDermott at the Auckland Property Investors’ Association meeting in July this year.  It will be great to understand where various interest rates are heading and why.