How to win in a rising rate market

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interest.co.nz estimates that homeowners could leave as much as $ 1 billion a year on the table because of the “loyalty” they show to the big banks.

Interest rates are rising and mortgage interest rates are expected to rise up to 2% more before the end of this “normalization” cycle.

Home loan borrowers have been the main beneficiaries of the low interest rate policies that have swept the world over the past decade since the GFC. But they could be the main victims as central banks try to revert to policies that don’t demand such low rates or such huge money printing (QE). Part of their motivation is to recharge their political resources for the next (inevitable) financial crisis (whether financial or pandemic-induced).

However, this implies an increase in benchmark rates and a direct transfer to real mortgage rates.

As at the end of July, there was $ 316 billion owed to banks for mortgage loans. The August level will be revealed later this week and will almost certainly hit close to $ 320 billion. Over 95% of that is owed to the five biggest banks – over $ 300 billion.

In the past year, borrowers paid nearly $ 10 billion in interest on these loans. It’s about to increase sharply. (And remember that was just under $ 12 billion in 2018, + 17% more.)

In a rising interest rate market, what can borrowers do to protect themselves?

First, you can “go long” by locking in lower rates for longer periods. But you may need a professional to advise you if this is the right strategy for you. In many cases, this may not be the case. Math is important, and part of that will depend on the difference between the terms you want to choose.

Second, you can change your repayment style to focus on paying off the amount you owe, rather than worrying about the interest rate. However, this is only a strategy for those who can exercise the long-term discipline required to make revolving credit agreements profitable. This is certainly not a strategy for those who use their home as an ATM to support impulse spending.

Third, you can choose the option with low cost of interest. Most borrowers are not.

As you can see in the rate spread tables below, at least 50bp is currently conceded to the biggest banks. (Red markers are primary banks, blue markers are challenger banks.)

The math is simple. If $ 300 billion costs +50 bps more than the cheapest option, that means $ 1.5 billion could theoretically be saved just by switching to the cheapest option.

However, there will be practical limits to achieving these savings. Smaller banks don’t have the capacity to absorb such a change if everyone has. And many borrowers, perhaps up to a fifth, lack the financial strength to justify getting the lowest “special” rates.

Still, that will leave most of those who won’t get the best rate lower. And in a rising market, they might prioritize such a shift. Remember that there will be few penalties for breaking a fixed rate loan in a rising interest rate market.

This still leaves us with the conclusion that at least $ 1 billion a year could be saved just by negotiating the rate harder, down to the cheapest deals. To do this successfully, you need to be prepared to make the switch if a main bank calls your bluff (and most do).

It’s just your money.

The latest prices are here. Our break cost calculator is here.

Use our unique dual mortgage calculator below to directly compare two options.

Complete mortgage calculator

Select the tabs of the chart


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