Mortgage Borrowing Strategy
Tony Alexander’s Quarterly Market Update for Advice Knight Clients
The Reserve Bank has recently lifted its official cash rate to 3.0% and intends taking it to 4%, probably before the end of the year. In response, banks are lifting floating mortgage rates for which funding costs are closely related to the level of the cash rate. But fixed mortgage rates have held steady after falling 0.2% - 0.4% since mid-June.
The cost to banks of borrowing money at a fixed rate to then lend to you and I reflects investor expectations of monetary policy over the fixed period – one to five years usually. Since June a view has developed that central banks will succeed in lowering inflation quite well through 2023, and with the economic growth outlook worsening cash rates here and offshore will probably be cut before the end of next year.
This means investors lending to banks at a fixed rate for two years (called the swap rate) are factoring in the cash rate rising to 4% then falling perhaps lower than the current 3% before August 2024. That seems a tad optimistic and over the past two weeks financial markets worldwide have pulled back on their optimism about inflation falling and bank funding costs have gone up again.
But they are not back to where they were in June and in an environment of intense bank competition for business in NZ fixed rates beyond the one year period may well have seen their cyclical peaks three months ago.
The one year rate is at risk of going higher because bank margins for this term are extremely low and there will be upward pressure as the cash rate climbs a bit higher.
What is the main implication for borrowers? Eventually, perhaps in the second half of 2023, medium to long-term fixed rates will fall away as certainty grows about monetary policy easing firmly through 2024.
But until then, fixing 1-2 years will likely be optimal for most borrowers, acknowledging that these rates will be the last and slowest to fall from current levels when certainty about falling inflation is truly, strongly justified.
_____
Tony Alexander is an independent economist with additional commentary available at www.tonyalexander.nz.