NeverQ in regards "As to if the banks would still Honor the low fixed rate when it raises so quickly I'm not sure"
When customers take out a fixed rate loan with the bank . For arguments sake lets say 4.8 % for a five year term . The bank effectively parcels all the mortgages up for the day/week and goes into the wholesale market and hedges this risk up in the swap market . So todays 5 year swap rate is 3.05 % , they can lock it in there ..... You have a contract they have to honour ......
So that is why when you break a fixed mortgage when rates have gone down the bank will ask for an early repayment fee as they have hedged the risk and will surfer a loss when you cancel your contract with them .
So the bank is not necessarily going to lose when rates go up if everyone is fixed at lower levels ( unless they have their hedging wrong ) .Any problem would occur in 2 /3/5 years time when the lower fixed rates start rolling off and you then have to take the prevailing floating/fixed rate which might be circa 7 % , that would be a pinch on a lot of budgets ......
Seems a bit dramatic. Fed will raise 4 times if this is at .25 of 1% then a whole 1% over the year. On a $1mill mortgage $10,000 a year extra interest on a $500,000 mortgage $5,000 extra a year or $100 a week. An average mortgage is probably a lot less than this.
If you have borrowed too much the monetary system has your back. Rising oil prices might spur on the long awaited inflation that will take care of your debt. I would guess a 1% interest rate rise will be way behind inflation, especially if you include housing costs.
2) Higher rates mean cooling market conditions and if prices slide in a big way then banks may start calling in the loans at low rates
Not unless said loans are in arrears! Confidence is everything in banking and a bank that "called in" a performing housing loan might as well shut up shop, permanently!
NeverQ in regards "As to if the banks would still Honor the low fixed rate when it raises so quickly I'm not sure"
When customers take out a fixed rate loan with the bank . For arguments sake lets say 4.8 % for a five year term . The bank effectively parcels all the mortgages up for the day/week and goes into the wholesale market and hedges this risk up in the swap market . So todays 5 year swap rate is 3.05 % , they can lock it in there ..... You have a contract they have to honour ......
So that is why when you break a fixed mortgage when rates have gone down the bank will ask for an early repayment fee as they have hedged the risk and will surfer a loss when you cancel your contract with them .
So the bank is not necessarily going to lose when rates go up if everyone is fixed at lower levels ( unless they have their hedging wrong ) .Any problem would occur in 2 /3/5 years time when the lower fixed rates start rolling off and you then have to take the prevailing floating/fixed rate which might be circa 7 % , that would be a pinch on a lot of budgets ......
Happy to be wrong! Just find it odd that we are at record low interest rate levels and if they climb quickly as they have in the past just how banks can keep that contract obligation without taking a massive hit
Happy to be wrong! Just find it odd that we are at record low interest rate levels and if they climb quickly as they have in the past just how banks can keep that contract obligation without taking a massive hit
NQ , I explained in my post they can hedge it in the wholesale market ... don't panic they don't make a billion dollars a year odd by losing money to the average punter on their mortgage .....
Interest rates are likely to experience upward pressure but despite the yearly bullish engulfing candle being a worthwhile peice of information the world as a whole remains tender and any hiccough from say China or Europe could easily cause a return to lower yields. Obviously Trumps stated fiscal expansionist policies are a big factor in this turnaround of trends but they have yet to be actually implemented and may not eventuate exactly as the market appears to be anticipating.
In NZ I dont expect the OCR to be raised much if at all in 2017. The first half is too soon and the second half is the election which will induce inertia, i.e. no change.
Bondholders should be wary if they are traders, but I personally wouldnt jump ship just yet especially if they are held as part of a full portfolio with laddered duration and equity exposure.
(edit - I just realised this is in the Property forum, which my comments are not specifically related to)
What is Wheeler doing that reserve bank governors haven't been doing for the last 20 to 30 years? Sounds like Topliss just annoyed Wheeler made him look clueless. I would have thought reserve bank governors and economists learnt the same thing at school. It is not a science it is a study of human behavior.
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