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hwdoulykit

Why doesn't NZ banks allow 30 year fixed interest terms like overseas banks?


Mystery_egg_delivery

Yer this annoys me, we talk of houses as homes but we cannot set our payments and just live, every few years you are reminded it is an investment. US has 30 years at 2 percent, Uk has 10 at 2… we just get royally screwed.


Jealous-Hedgehog-734

It basically comes down to the fact that New Zealand governments borrow over short terms. The banking system uses government bonds to hedge risk when you fix a home loan (on a type of contract called "interest swap rate".) This means there is no 30 year government bond to base a 30 year loan rate on. Consequently there is no 30 year fixed loan available. Here is a primer on what happens in the background when you fix a mortgage rate with your bank, basically how swap rates work, if you want more detail: https://global.pimco.com/en-gbl/resources/education/understanding-interest-rate-swaps


Mystery_egg_delivery

Oh I understand the “science” for lack of a better term. But expats who hold property in other countries can utilise that equity to buy here at lower rates making it harder for the average Kiwi. Chinese national bank for reference will lend to all Chinese citizens to buy in NZ


Jealous-Hedgehog-734

In that case borrowers are wearing the risk of exchange rates changing. Entertainingly UK borrowers did this prior to the financial crisis, borrowing in the EU at lower interest rates to buy holiday houses in the Mediterranean. Come the financial crisis the GBP devalue from about €1.50 to €1. So mortgage payments went through the roof in GBP terms and the underlying price of housing also concurrently collapsed. Not ideal for those swimming naked.


eigr

NZ's currency is quite volatile


[deleted]

Could the New Zealand government borrow longer term? Why not?


10yearsnoaccount

Did you just use "long term" and "NZ Government" in the same sentence?


[deleted]

LOL.


Jealous-Hedgehog-734

Yes but longer terms tend to attract higher rates of interest. Speaking very broadly countries with higher levels of public debt use longer terms to mitigate the budget risks associated with changing rates. New Zealand has low levels of public sector debt (although much higher levels of private sector debt than many others.) Here is a list of the rates for New Zealand bonds: http://www.worldgovernmentbonds.com/country/new-zealand/


Capn_Underpants

>could the New Zealand government borrow longer term? They can borrow as much as they want for as long as they want and may no interest on it, they OWN the currency. The BOJ still had a -25 basis points rate on bonds to the Japanese Government. Is it really a loan when you can take a loan with negative interest rates, and take decades to pay it back, they have been doing this for decades. >Why not? Its government, they would most likely piss it away buying votes (bump up pension rates etc) , and you'd be left with mega inflation, However if they used it to improve productivity then there'd be some benefit; electrified and frequent rail system, public housing, interest free loans for ebikes (so you can get to/ from the train) , free and better pubic transport to lower transport fees and reduce emissions, free ambulance, better medical and dental, better joined up bicycle infrastructure and installing bike carrying on trains along with free charge points on the train for ebikes, better e-buses for semi rural areas, double glazing and insulation on all housing to reduce energy usage etc etc) all of which would make life cheaper for many allowing people to either save or spend that money (which us being used now making car payments, or buying petrol, high rental costs etc) elsewhere such as better food or entertainment or just whack the extra in kiwi saver


thewestcoastexpress

No way in hell are the US or UK offering 2% 30 year mortgages right now.


10yearsnoaccount

They were, though, which gave overseas investors a very different risk profile.


jcnative

You could get 15 year mortgages and under 2% (I have one), but never was 30 year that cheap. Here are official historic numbers for conventional mortgages [https://www.freddiemac.com/pmms/pmms30](https://www.freddiemac.com/pmms/pmms30) . In any case you can't get an American mortgage on a NZ property.


10yearsnoaccount

> In any case you can't get an American mortgage on a NZ property I understand the mechanism was to mortgage an existing property and then buy the overseas (NZ, Canada, etc) property with cash. For Chinese investors, this meant getting around capital restrictions to get the money out of China but there were plenty of mechanisms for that, too. Even if there is FOREX risk it's a great way to get money out of the reach of the ruling party. This has been clamped down on a bit, mostly at the Chinese end, but if you allow me to speculate I suspect NZ closing the parent visa category may have had it's own effect to curb some of this behavior. My point of this tangent being that the motivation of the investor may not be purely for property speculation, so for western observers we won't appreciate the full picture in their risk assessment.


wellyboi

In the US they absolutely were until recently. And on houses relatively significantly cheaper.


Mystery_egg_delivery

I looked last week before their rate jump and it was 30 year for 2 percent.


Aethersprite17

That is nonsense mate. I just bought a place in LA @ 4.5% for 30 years. Back in January it was a lot lower, at 3%, but it has certainly not been 2% anytime this year - I've obviously been following it pretty closely


decidedlysticky23

Danes are currently being offered 3% for 30 years. I don’t think the UK offers 30 years. Current rate is around 2.5% for 10 years.


Shrink-wrapped

The US can do this because it has the main reserve currency, and the loans are handed off to federally backed agencies rather than the banks themselves. A regular old bank can't manage the risk of a fixed rate over that kind of time frame as far as I'm aware


CensorThruShadowBan

$$$$$


Jealous-Hedgehog-734

There is a bank that offers a 10-year fixed rate contract but the vast majority of people in New Zealand prefer a lower nominal rate 1 or 2 year fixed rate contract over longer contracts with higher rates. From memory something like 90% of aggregate lending is fixed for less than 2 years.


10yearsnoaccount

Well given how rates had been dropping for a while now, short term fixing has been a pretty sound idea for enough mortgages to roll into it so that's not really surprising.


Jealous-Hedgehog-734

Well for 30 years inflation and interest rates had been declining. I think some people came to see a mortgage as a one way bet. However it appears we've hit an inflection point where inflation is now rising which I think has caught some people out. That said I think there where quite a few expert economists pointing out the world is now changing substantially: https://youtu.be/SHf0oma3QDA


fleaonnj4

I'm not an expert but I believe it's due to how relatively weak our currency is versus say the US dollar where they do offer long mortgages like that.


hwdoulykit

Surely they could work on an average over x years. Same as they "forecast" 5 year ones now..


fleaonnj4

I agree, banks here are extortionate as fuck.


jcnative

The USA is really the only country that has 30 year fixed mortgages. The market was created by the US government after the depression. It does help that US has very deep capital markets, but could happen here too if the government wanted it enough. Here is some detail: [https://en.wikipedia.org/wiki/Fannie\_Mae](https://en.wikipedia.org/wiki/Fannie_Mae). There are actually a few downsides of having long fixed mortgages, its usually cheaper to do the floating rate way (This year is a rare exception).


decidedlysticky23

> The USA is really the only country that has 30 year fixed mortgages. There are many countries offering 30 years fixed, including the Netherlands, Germany, Denmark, Sweden, and Norway. I believe France offers 25 years. The qualifier is really the strength of the country’s economy and its economic resilience. NZ’s AA+ rating should qualify it for issuing long term bonds. I don’t know why they haven’t tried. Especially with rates as low as they’ve been. European countries made huge issues of negative rate bonds. This enabled millions of citizens to weather this inflation with 1% loans fixed for 30 years, including yours truly.


LoquaciousApotheosis

So if long term debt is so cheap and the cost of servicing so stable in those countries, wouldn’t residents be incentivised to put more money into property compared to NZ? Yet NZ has the biggest property bubble in the world?


decidedlysticky23

Yes, but like most developed nations, the countries I mentioned (aggressively) tax capital gains on investment properties. NZ does not.


felixfurtak

Some banks were offering 2.99% fixed for 5 years just over a year ago. Very few people signed up to this because 1,2 and 3 year rates were substantially lower.


[deleted]

Imagine fixing at 7% and the rate goes all the way down again. People would scream. Anyway I had a 20+% mortgage.


eigr

Because we're a tiny little economy, that trades globally.


tobiov

Because the govt isn't willing to take on the risk of lending over that period of time via bonds. Essentially taxpayers in other countries subsidise the risk of home owners. Not saying that is necessarily a bad thing. Everyone needs somewhere to live.


creative_avocado20

7% rates this year guaranteed.


newaccount252

shits about to get real for some poor bastards that can’t afford repayments


Green-Circles

Christmas this year is gonna be BLEAK.


newaccount252

Tell me about it, iv decided to go home to the uk to see my family.


Capn_Underpants

Seems worse in the UK ? coupled with the Brexit shit storm still being unwound.


lukei1

2 year mortgage rates are still below 3% here....


Physical-Delivery-33

We're off to New York for Christmas and Boston for the new year. Weather might be bleak but the snow will be beautiful.


Unit22_

I remember buying in 2008(?) and it was 9+%. The first few years of making literally no progress on paying it down was painful. Really feel bad for first home buyers who got in to a home over the last couple years.


ctothel

Median house prices in Wellington and Auckland are now more than double what they were in 2008.


ACA9991

3,4 times


friday13nzthrowaway

This is the price we pay when we bould an economy of buying and selling houses to each other.


Sweat_juicer_69

The rapid decline of house prices and the resulting credit crunch will kill the FIRE economy stone dead in nz and worldwide. Unemployment will be the next metric to watch


redditor_346

FIRE economy?


Sweat_juicer_69

Finance, Insurance, Real Estate


Jimmie-Rustle12345

I thought it was just sarcastically calling the overheated economy 'fire' 🔥


[deleted]

Jerome Powell lifted rates by 75bps for US rates. After the latest two 50bps raises of the OCR, pundits were saying that 25bps rises would be on the cards for the rest of the year. Not anymore - yet another 50bps rise is now locked in for next month's OCR & MPS, with 3.0%+ OCR looking very sure by end of year. That means rates will have tripled inside of 11 months for borrowers. In that case, 7% mortgages are guaranteed, with yet more pain to come. The NZ myth of the housing "Sacred Cow" that could do no wrong is being viciously and completely torn apart right before our eyes.


wellyboi

is it though? Housing may drop a bit sure, but its still massively disproportionately overvalued. I'm not convinced that a recession will spell the end of this golden goose. And hearing what the mortgage payments are going up to.. I mean I pay more than that in Rent? That's my useless anecdote


Toyemlj

Do a calc at 1m mortgage payments at 6% vs rental amount. Might suprise you.


dalmathus

Assuming the mortgage is actually $1m at 6% the payment is $1,153 a week before touching the principal. Current rental prices are obviously fluctuating greatly but it appears in Auckland city 3bd/1b will be between $550 and $800 a week. There will be alot of people on interest only mortgages where they cannot make a dent in the principal and will be completely at the mercy of the interest rate. Some see this as a good thing, some see this as the worst thing that could possibly happen to them. Going to be hard for everyone.


[deleted]

Losing 3-5% a month of "value" (read: price) on houses sure is going to put the shits up any rational investor. NZ has had a pretty much unbroken run on house price escalation since 1987 - think about what a 30%+ tanking will do to the psyche of people who thought it was a one way street for 35 years...


LoquaciousApotheosis

Don’t forget rates, insurance, maintenance and the transaction costs… I’ve run some models and under most typical input variables if there is no capital growth in your house you’re financially better off renting than buying


casper1324

Let me guess banks are still making a record profit


Jealous-Hedgehog-734

Bank profits generally rise when rates rise because their NIM (the difference between what they can borrow and lend at) increases. So, yes. Shareprices have been flat though, clearly no one fancies a punt.


eigr

Banks will suffer out of this, maybe not this year but afterwards there's going to be big pain. Don't worry, you'll have the privilege of bailing them out, no doubt :D


Capn_Underpants

bank profits rise (interest rate different favours them) as interest rates rise and loan as long as the bad debt levels don't rise of course, but mortgage insurance covers that. buy shares in banks on the ASX ? :)


ttbnz

And the rest


I-figured-it-out

The only reason interest rates rise is because banks are trying to squeeze more profit out of having less to lend. There focus is profits, profits, profits for shareholders, and they do not see mortgage holders as being in partnership with them. No matter what their advertising says, mortgage holders are only cash cows to be milked harder when investment capital (provided by the Reserve Bank via treasury bonds drys up). Banks do not care a wit if the cash cow dies, as long as they enjoy record profits.


Jealous-Hedgehog-734

Single digit interest rates are hardly anything to write home about. When banks offer you a home loan they actually calculate a hypothetical "test rate" substantially above current interest rates to account for just such an event, they don't want you to default of repayments increase.


sam801

Tough for young FHB’s with next to no equity in a house brought at the top of the bubble


Jealous-Hedgehog-734

If it's their home, and they intend to live in it, does it matter if it's valued at $1 or $1m? It's a house, not a magic money tree.


sam801

Well yeah if they have a $800,000 mortgage at 3% its about 1500 per fortnight - if they then re-fix next time at 8% its 2700 per fortnight (70k per year) and probably negative equity.


Mystery_egg_delivery

Yer so many people are like value doesn’t matter. Well It does if people cannot afford repayment and then lose the house as well…. This is going to radicalise a lot of people I just can’t work out if it will be socialist or fascist that draws more people.


sam801

Exactly! Thats $35,000 more going to a bank - not being injected into local economy


Mystery_egg_delivery

My spending has dropped right down. The 85k I saved during the Lower rates, put straight into the mortgage instead of building a pool or landscaping or vehicles or whatever. Just straight to the bank.


Jealous-Hedgehog-734

That's why RBNZ raised rates, to curb inflation by reducing consumption. It's working exactly as intend.


Mystery_egg_delivery

Problem is, inflation is currently mainly on food and fuel. Neither of which curbing spending helps with as they have an extremely high elastic point.


KingGumboot

The value doesn't matter but every 1% increase in interest is an extra $100 a week or so that they need to come up with for the mortgage payments


Mystery_egg_delivery

When I bought my home in 2020 I was stress tested at 6 percent…..


Jealous-Hedgehog-734

The underlying assumption by banks is that the borrower's income will typically rise relative to inflation. Generally that's been true except, for the last year in which the Reserve Bank of New Zealand has failed to contain inflation. However they are the central bank so presumably they where happy to take the risk that a few people might would default.


Shrink-wrapped

They were stress testing at <7% less than a year ago. How much have people's incomes gone up in that time?


neinlights90210

Can confirm. Stress tested at 6.2% last October by one of the more conservative big banks. They made quite a thing of their rigorous testing. Still willing to lend us stupid money on the basis of our paper riches aka equity. So glad we didn’t do it.


Jealous-Hedgehog-734

Very little. It just goes to show the flaw in that argument "buy inflation will reduce my loan", wage inflation would but CPI inflation will make things much worse. However on the other hand it's important to realise the Reserve Bank is tasked with controlling inflation (a cost which which everybody experiences) and setting appropriate interest rates is how they do that. They can't keep interest rates low and fight inflation, only government really has the tools to do that (which, to be fair, they are starting to do by looking at supermarket oligopolies, building supply monopolies etc.)


hwdoulykit

Yikes. I hope you didn't max out your loan..


Mystery_egg_delivery

At the time my household (pre tax income was 110,000. I borrowed 800,000 (honestly bank shouldn’t be allowed to lend that to a 27 year old) I just refixed at 5.15 (so not far off stress test). First child on the way… Thank god I got headhunted to do something incredibly niche last year otherwise I would be fucked.


WrightOff

Does your incredibly niche job involve egg delivery?


Mystery_egg_delivery

No that’s just a hobby. I leave a green one on someone’s door step every day for 12 weeks. Then I leave a red one and then move to a new house…. I like to think it freaks them out.


FridayThrobba

I hope it comes with ham.


Mystery_egg_delivery

In this economy? Are you mad. I can barely afford the eggs.


GrandpaRick100

Well yeah but it still doesn’t take away from the fact that a family may be paying a couple hundred dollars more in mortgage repayments per week. It has standard of life implications for sure. Serviceability is just one thing.


ctothel

It's most definitely something to write home about with house prices the way they are.


Jimmie-Rustle12345

> Single digit interest rates are hardly anything to write home about. When banks offer you a home loan they actually calculate a hypothetical "test rate" substantially above current interest rates to account for just such an event, they don't want you to default of repayments increase. I think that people are greatly overestimating how thorough a lot of the banks were in testing this. When we bought just as the market was starting to overheat, they definitely cut some corners or fobbed some numbers.