As I am sure you are (painfully) aware, it is all go on the Home Loan interest rate front...  and to be honest, not a lot of that 'go' is great news for those who are borrowing money…

The Official Cash Rate has gone up. And this changes some things for mortgagees.

Firstly, some facts.

• On 13th April 2022, the Official Cash Rate (OCR) increased by 0.5% to 1.50%.
• The next Reserve Bank announcement is on the 25th May and the current thinking is that the OCR will increase by either 0.25% or 0.5%
• The Reserve Bank have indicated that the  "top of this interest rate cycle" will be an OCR of around  3.25%.  They had predicted this for 2024, but those time frames have been coming back over the last few months..
• On the 21st April annual inflation was announced at 6.9%.  This is way above the RBNZ guidelines (but just under market predictions)  and also is the reason they increased the OCR by 0.5%, and are likely to  continue this momentum.  (FYI - The major reason the Reserve Bank exists is to keep inflation between 1% and 3%.  They are required to  do whatever they can to get inflation back into this band (recognizing of course that lots of this inflation is due to international factors and not in their control to fix!)
• As a result of the OCR increase, banks increased their floating rates and, at time of writing, a standard  floating rate is around 5.50% (discounts are often available off these rates)
• At time of writing, a standard (discounted) one-year  fixed rate is around 4.50% and a five-year rate is around 6.00%

Do you have a fixed loan rate coming up review?

Consider the following.

Assume increases will continue

Firstly, I think it would be wise to expect rates to increase somewhat from here over the next 12 months.  According to some economists, the bank may have" priced in" some of the predicted OCR increase to their current fixed rates.  While this may be true to an extent, I think it would be risky to assume rates are at the top of their cycle quite yet. 

Factor in what's coming up in the next few years

When deciding, think about your personal situation over the next few years. (My opinion is that for most people it is really hard to have any degree of certainty for longer than a few years.) 

Decide when to take the hit

Do you want or need a slightly cheaper mortgage payment now and can afford another increase in a years’ time?  If the answer to this is 'yes' you would lean towards fixing for one year.  This would suit people in certain situations, i.e. A family who is currently on one income and going back to two incomes shortly. Or, perhaps you have day-care/childcare costs now that will stop within the year. Maybe you are expecting a pay rise within a year. 

Do you need some certainty for the next few years?  If so, you may choose to fix for say 3 years.  The 3-year rate is probably going to be a big jump from what you are currently paying, but you may choose to take that 'pain' now and then adjust.  Yes, you could fix even longer, but at this stage we are starting to speculate about how long the current cycle will last for. It is so hard to predict this!

Should I break a fixed loan now to lock in a current rate?

 Perhaps! If your current low fixed rate has only a few months to go (remembering you already can "lock in" a new rate 6-8 weeks prior to your fixed rate expiring) and you want to fix for 2,3 (or even 5 years) it may well be worth breaking your current loan and taking the hit now. It certainly isn't always the case, and you are playing a "guessing game" to work out if the extra you will be paying immediately would be less than the savings you will make for the next fixed period. 

To do the maths on this you would need to estimate what the rates will be when your current fixed loan is due to expire, and how long your new fixed rate period would be and do the sums from there.  If this is something you are considering, do let your Velocity adviser know and we can work this through with you.

Some final thoughts

 If you have a fixed loan rolling off soon, expect your loan repayments to increase. There is going to be a level of "sucking it up" or "tightening ones belt" for the next period and there are very few things that can be done about that.

 It is only for a season.  Rates are currently going up (admittedly they have gone up pretty fast this cycle).  They will stabilize and will go down at some stage.

Things are very uncertain. You will need to make a decision which has an element of 'guesswork' to it. We are happy to work through this with you and will consider all the factors, but in the end we can only ever make the best decision with the information at hand.  Given the world events of the last two years, I think we are all aware of the uncertainty of our environment.  So let's make the best decision we can and 'hang on for the ride'.

Brendon.

About Brendon:

Hi, I'm Brendon, one of the owners and advisers at Velocity Financial. I have been giving advice on mortgages and insurances at Velocity for around 15 years, and it is great to be able to work with people to achieve their financial goals. Prior to giving money advice I worked as a youth worker and managed teams for a not for profit organisation. I live with my wife and one of my sons (the other one only stays when he needs food) in Berhampore, and if I'm not talking revolving credit accounts I can be found running the trails of Wellington.

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Disclaimer:

Brendon Ojala (FSP119244) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Brendon’s disclosure statement on our website

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