Things are settling nicely, but for how long?

The last few weeks have seen interest rates stabilise a little.

Longer term rates (i.e., 3,4- and 5-year interest rates) at the main street banks are settling at around 6%.  Shorter term rates (1-2 years) are settling at around 6.5%.

Most commentators and economists I listen to think the longer-term rates have peaked, and at some stage will start nudging down.

The 1-year rate is more influenced by the Reserve Banks OCR announcements, so these MAY keep nudging up a little. The two-year rate needs watching.  (The banks have some good margins on this rate right now, so perhaps some discounting may happen here in the weeks to come. My first tip of the month.)

Of course, as soon as one suggests some stability, prepare for a bombshell.

Things to watch:

Look out for the next OCR announcement (on May 24^th) and the Monetary Statement that will accompany this, which outlines how the Reserve Bank sees things going over the next period.

Look out for world (and NZ) inflation figures, that right now seem to be dropping away.

Look out for NZ recession (i.e., quarterly GDP) and employment figures, as these will have an impact on interest rates.

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It is one thing to say rates have stabilised and have reached (or almost reached) their peak, but it is another thing to work out when any drops in rates will start to occur.

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This will be a key factor in deciding how long to refix your Home Loans.  Surely, it is smart to align the end of your fixed term for when rates have started to decrease.

It is so hard to predict when this will be (I think the Reserve Banks narrative on 24^th May will help with this, as they literally say when they think they think the OCR will start to drop!)

But the OCR is only one factor.  If I had to put my money on when Home Loan rates will start to be significantly cheaper, I would say 1-year to 18 months.  If I was feeling ‘conservative’ and happy to pay the current higher rate for a little longer I would say 18 months (it is also the cheaper of the two rates right now)  but as the year zooms on by, maybe we are getting close to that 1-year rate being the ‘sweet spot’.

Here is the kicker though.  Right now, the 1-year rate is the most expensive fixed-rate on the market, so you will be paying for this decision in the short term.

My observation is that typically most Kiwis just pick the cheapest rate at refix time.  I think we are in a part of the cycle where this may not be the smartest move.

Here is my second tip of the month:

Before you decide what term to refix your loan for, work out what the new repayment on the different fixed periods will be.  I think you will find the difference between the periods won’t be as big as you think they will be (that is, it won’t make a huge impact on your day-to-day cash flow.)

Regardless of what you do, I would urge you to talk your options through with your adviser first.  We aren’t fortune tellers, but at least we can work through your specific set of circumstances and give you some guidance here.

Book in a chat about your home loan with one of our advisers today.

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.

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