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The big drama for interest rates occurred on 22nd of November, when the Reserve Bank increased the Official Cash Rate (OCR) by 0.75%, a record increase that took the cash rate to 4.25%. (The days when it was sitting at 0.25% seem like oh so long ago - but it was only less than two years ago.)
What was potentially more nerve-wracking for New Zealanders was the Reserve Bank’s statement, advising they expect the OCR to now peak at 5.5% during 2023.
This above prediction was coupled with the somewhat parental and explicit warning from the Governor of the Reserve Bank, that New Zealand would head into a recession next year, unless we stop excessive spending now.
The above warning had the desired result of scaring New Zealanders. The media also noticed this, as you would expect.
The Governor is probably correct. If the collective “We” (aka. us splurgy Kiwis) do stop spending, things will be easier for all next year.
The bit that is not so cool, in my humble opinion, is that a whole lot of us are living with heightened anxiety and fear about the future, and surely this isn’t a great thing for our collective psyche.
Before we talk specifically about what to do with our home loans, one interesting observation to note.
Although the OCR rate has increased, wholesale rates have not, and in fact they have eased back a bit.
Given this, I was surprised when banks not only increased their floating rate with the OCR increase, but also their fixed rates. (I think they will argue they also increased their deposit rates, so their cost of borrowing did increase - but I am not 100% convinced by this argument.)
OK, so that is the background. Where are we at today?
Most discounted fixed rates are in a pretty tight band from around 6.5% for a 1-year rate to 7% for a 5-year rate.
This “tight spread” between fixed rate periods - and the fact that longer term wholesale rates are now cheaper than short term rates - would indicate that although the Reserve Bank is predicting increases to the OCR, Home Loan rates may be actually nearing their peak.
Many economists and commentators are saying the Reserve Bank is going too hard at rates and this will “crash” the economy, which will have the effect of needing to reduce rates to stimulate growth and demand again. Time will tell who is right.
We may not be at “peak interest rates", but I think we are getting close.
If that is the case, if you choose to fix for 5 years, this may well cost you in years 3, 4 and 5.
For the last few months, I have been saying a 3-year rate is the “sweet spot,” but I think it is now a tossup between that and the 2-year rate.
(Some advisers at Velocity are leaning strongly to recommending the 2-year rate.)
As always, if you “just don’t know,” you can “hedge your risk” by splitting your loan into different parts and setting them for different terms.
Here is some important advice regardless of when your fixed rates are due to roll off (watch our really important advice here)
If you haven’t time or the inclination to watch that, let me summarise:
Don’t panic.. but DO plan ahead.
You know your payments will increase when your fixed period rolls off (unless you were super smart and paying a lot more than the minimum regular payment over the last few years.) Work out roughly what the payments will become. If you can afford these, then no problem. If you cannot afford those payments, let us talk about this NOW.
Knowledge and a plan on hand is very reassuring, not to mention and anxiety and fear-reducing. For the vast majority of us, it will be OK. But I do recognise that for some, it may not be. We are here to help regardless of your situation, so do make contact if we can help work through the options with you.
Go well out there!
Brendon.
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.
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.