ASB economists have warned borrowers to prepare for interest rate hikes and higher repayments.
“Our projections suggest that mortgage rates will continue to rise for the remainder of the year,” said Chris Tennent-Brown, chief economist for the bank.
The rise would continue thereafter, and the ASB’s projected home loan interest rates could be 1-2 percentage points higher by 2025 than they are now.
“The ASB now expects the Reserve Bank of New Zealand to begin raising the Official Cash Rate from its record low of 0.25 percent in November 2021.”
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The bank forecast that the official cash rate (OCR) will peak at 1.5 percent in late 2023 or early 2024.
While this meant home loan borrowers faced higher repayments, mortgage rates were not expected to return to pre-Covid levels.
“This suggests that mortgage rates are likely to level off at historically low levels, but at rates slightly above our earlier projections,” said Tennent-Brown.
“Borrowers are wary of putting their budgets on higher interest costs than the interest rates offered today,” he said.
Borrowers have traditionally fixed their loans for short periods of one and two years and then fixed them again at the same maturities after the original maturities had expired.
“It is predicted that setting the cheapest shorter terms and then rolling fixed-rate mortgages over a five-year horizon is the cheapest option,” said Tennent-Brown.
However, there was a risk that this strategy would not become cheaper in the long run if interest rates rise faster than expected.
“This strategy seems increasingly exposed to the risk of a faster than expected release of monetary support and a higher endpoint for the official cash rate (and mortgage rate) than our previous projections,” he said.
People worried about their future home loan costs might want to look at longer term interest rates.
“For those who want longer-term interest rate security now, the cost of a two- to five-year fix is still very low compared to the last 20 years,” said Tennent-Brown.
“For those who certainly need it now, there are currently fixed terms at a very low level, around 2.2 percent to 2.6 percent for one to two years and 3 percent to 3.7 percent for longer terms. “
Borrowers could get security and a significantly lower interest rate by setting their mortgages instead of having a variable rate mortgage.
“The floating cost is significant at about 2 percent above what you can currently fix, but some borrowers still prefer the flexibility that comes with floating mortgages. Borrowers may also consider splitting the mortgage into different terms to better suit their interest rate security preferences versus maintaining flexibility, ”Tennent-Brown said.
Mortgage rates fell to their lowest level on records dating back to the 1960s as the Reserve Bank tried to stimulate the Covid-hit economy last year.
The economy has done so well that the ASB now expects the Reserve Bank to lift the OCR sooner than previously expected, but the future has always been uncertain.
Tennent-Brown warned, “It is always the case that actions by the Reserve Bank and renewed threats to the economic outlook could cause mortgage rates to fall.
“In addition to trying to minimize your interest payments, a good mortgage strategy must also take into account your personal cash flows, your tolerance for uncertainty, and your ability to deal with changes in future mortgage payments when interest rates change. The financial situation of any individual can change and this must also be taken into account. “