Why Have Long-Term Fixed Mortgage Rates Risen?
June 8th, 2009
The National bank explains the background to the recent increase in the interest rate of fixed term home loans. The bank asks why if floating rates have continued to fall in recent times, have longer term fixed rates (3-5 years) increased? The OCR is an important factor in floating or short-term home loan interest rates. However, longer-term fixed-rates are more affected by other factors such as trends in overseas financial markets. This is because banks and other financial institutions have to borrow money from overseas money markets to meet the demand for longer-term fixed-rate home loans. And because of the crisis in the financial markets, this money is harder and more expensive to get.
The bank says these are very uncertain economic times, and as a result, overseas lenders are demanding higher margins to compensate them for the uncertainty involved in long-term loans. They are also “pricing in” the expectation interest rates will increase over the long-term, possibly through inflation as a result of all the money Govts are pumping into their economies to try to stimulate activity. All these factors mean borrowing from overseas for longer terms is more expensive, and this is being reflected in long-term rates.
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