Mortgage risks jump as wholesale markets struggle
A whiff of instability and broken agreement sweeping through wholesale money markets, suddenly raising the stakes for indebted homeowners, especially those soon to refinance
The next banks to increase fixed mortgage rates are Westpac and TSB.
Even though they are almost done with the last round of mortgage rate hikes, they won’t be the last. Far from there. Another round will start soon and with increases as large as the recently completed round – maybe more. Much will depend on how the wholesale markets work on Friday.
And that’s because Thursday’s swap rates continued their very steep hikes, and the hikes of the past three days are more than enough to secure further hikes for homeowners.
In addition, there is a kind of crisis brewing in the wholesale money markets. There is a suggestion that these markets are breaking up; there is a dearth of receivers on the market that are needed to close a deal. Without them, banks cannot hedge their risk and if they remain exposed, the risks for bank treasurers increase sharply. It can become a vicious cycle for banks and these new risks are not taken into account. Their only recourse is to sharply raise rates to cover this new undesirable risk.
It is a very uncertain and worrying time for banks when this happens – and that worry will be felt by homeowners who need to close a deal. For the most part, there is no choice; either you accept that significantly higher fixed rates are offered, you are forced into a variable rate, you find an alternative bank (which will likely be in the same situation) or you pay the loan back in cash.
Borrowers suddenly lost all bargaining power.
Broken markets increase the risk of serious instability and the possibility that deals cannot be made, truly exposing debt positions.
Back on the retail banking side, Westpac and TSB also raised rates on term deposits, with Westpac joining BNZ offering a 3% rate for a five-year term.
A useful way to make sense of these modified home loan rates is to use our complete mortgage calculator which is also below. (The rates for term deposits can be estimated using this calculator).
And if you already have a fixed-term mortgage that is not currently up for renewal, our break cost calculator can help you assess your options. But breakage fees should be minimal in a rising market.
Here is the updated snapshot of the lowest advertised term mortgage rates currently offered by major retail banks.