Borrowers looking for certainty should fix lower rates now

"Interest rates are expected to keep lifting over time as the world gets past the worst of the pandemic"

Borrowers looking for certainty should fix lower rates now

With the Official Cash Rate (OCR) increased for the first time in seven years, borrowers looking to make the most of low interest rates should fix a longer-term rate now according to ASB, which stated that mortgage rates are “now past the low point.”

ANZ, Kiwibank and The Co-operative Bank have already lifted their floating rates and some savings rates, and ASB said that more rises are very likely to follow as the OCR gets hiked further. It has currently pencilled in a 1% OCR within the next six months, lifting to 1.5% by late 2022.

Senior economist, wealth Chris Tennent-Brown said that although “clear risks” remain with the ongoing spread of COVID, the core view is still that the Reserve Bank will lift the OCR by 25 basis points in both November and February. He noted that bank capital requirements will also put upwards pressure on rates, and so borrowers looking for certainty should look at fixing a longer-term rate while they are still relatively low.

“New Zealand’s resilience to date and out medium-term economic prospects mean we think the Reserve Bank will keep raising interest rates in the economy over the next year, despite the latest COVID-19 setback,” Tennent-Brown said.

Read more: OCR decision puts an end to mortgage rate wars

“Mortgage rates are now past the low point, and our forecasts suggest rates will continue to lift from current levels over the next five years. For those that require certainty now, fixed terms are currently available at very low levels.”

“If the situation changes for the worse, then the Reserve Bank has options to maintain current settings for longer, or even lower borrowing costs to support the economy,” he added.

“In addition, fiscal support will continue. But if New Zealand and the global economic outlook continues along the positive path we expect, long-term interest rates are expected to keep lifting over time as the world gets past the worst of the pandemic.”

Commenting on how much borrowers can expect mortgage rates to rise, Tennent-Brown said that this is difficult to predict - however, they are likely to still be “well below” the averages of the past 20 years.

“How high rates get depends on a host of factors, including the Reserve Bank’s OCR settings, inflation and bank funding costs, many of which are difficult to forecast with a high degree of accuracy,” he said.

“Based on our expectation that the OCR will peak 1.00% higher than current levels, and our assumptions about bank funding costs and inflation forecasts, we expect mortgage interest rates will lift to levels around 0.8% to 1.3% higher than they are now, with fixed rates largely in the 4-5% range.”

“However, as is often the case, the outlook is far from certain,” he added.

Read more: Reserve Bank releases October OCR decision

“Borrowers can lock in low longer-term interest rates under 4%, if certainty over a longer period is of the utmost importance.”

With Auckland and parts of the Waikato still at Alert Level 3, economic pressure has certainly been rising - however, areas of the country with lower restrictions have recorded spending levels closer to normal, and business confidence has remained high.

Satish Ranchhod, senior economist at Westpac said that we are likely to see a “soft” end to economic activity this year, though it is expected to bounce back quickly once restrictions are lifted.

“This latest Delta outbreak has persisted for longer than anybody had anticipated, and we are seeing some stark differences in conditions across the country,” Ranchhod said.

“In areas under Level 3 like Auckland and the Waikato, we are seeing some tough times for many households and businesses, with overall spending levels down by about 30%. The disruptions in those areas are being felt around the country as well, due to the impacts on manufacturing and distribution.”

“But as we move south across the country, we are actually seeing some firmer conditions,” he explained. “Spending levels are running at roughly the sorts of levels that we saw prior to the outbreak, but of course, it is still a mixed picture.”

“With the ongoing outbreak, it is likely that economic activity for the final part of this year is going to remain on the soft side,” Ranchhod concluded.

“But as we go into next year and when those activity restrictions are eventually eased, we do expect that the activity will come back pretty quickly. That’s what we saw happen last year, and that’s been supported by monetary and fiscal policy.”

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