Mortgage Borrowing Strategy
Tony Alexander’s Quarterly Market Update for Advice Knight Clients
The Reserve Bank have taken the official cash rate up from a record low of 0.25% to 2.0% and a peak at or above 3% is likely in the next 6 – 12 months. In the financial markets the anticipation of higher short-term borrowing costs for banks has led to fixed mortgage rates rising well in advance of actual monetary policy changes and led to the likes of five year rates climbing near 3% and one year rates near 2%.
These strong rate rises since just before the middle of 2021 have come very early on in the tightening cycle as compared with the last period of extended rate rises from 2005 to 2008. That helps explain the quick reaction of house prices (assisted by the credit crunch) and evidence of household spending being reined in very quickly.
But these speedy rises also mean even though additional monetary policy tightening remains, the extent to which fixed mortgage rates rise is likely to be less than further official cash rate increases. In fact, there is a good chance that the 2-5 year rates only increase another 0.5% from current levels while the one year rate perhaps climbs another 1%.
The main implication of this outlook for borrowers is that the time for fixing long to avoid higher rates disappeared a long time ago and for the next two years the optimal choice is probably fixing 1-2 years with a tad longer for those of more conservative nature wanting some extra stability in these very uncertain times.
Late this year the discussion about interest rates is likely to shift away from rate rises and the likely peak to when rates will start falling again. My personal pick is 2024, but without knowledge of who will invade who and how the pandemic and supply chains alter, we all have to be very careful not to get too clever in thinking we can build a strategy around a likely rates scenario. Managing risk is not the same thing as backing a particular set of forecasts.
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Tony Alexander is an independent economist and produces a free weekly publication with a housing focus called “Tony’s View”, available for signup at www.tonyalexander.nz.