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When I wrote my last Fixed Vs. Floating blog (at the end of September), a one-year fixed Home Loan rate was around 5.4% and The Official Cash rate (OCR) was 3%. Then, the OCR was predicted to go to 3.5% in early October, and then up another 0.25% at the end of November. (You can read more on our economic outlook here.)
A month on…. (Time of writing is 30/10/22.)
An average discounted 1-year fixed rate is 5.9%. The OCR did indeed increase to 3.5% and now predictions by economists and commentators are that the November 23rd OCR announcement will move to 0.5% (or some even saying 0.75% increase.)
As a result, most banks in the last few weeks have increased interest rates across all fixed terms by 0.3%-0.5%.
It is fair to say the predictions for interest rates are more “bullish” (i.e., moving higher more aggressively) than they were a month ago.
The reason for this? Worldwide indications of inflation are higher (and for longer) than expected. In short, this has pushed up international wholesale rates (the markets where banks source a percentage of their Home Loan money) and this has flowed through to our fixed interest rate increases.
I know that is not rocket science (just economic science) and I know it is vague. However maybe it is the best anyone can do right now.
The key questions of course are, when and at what level they peak, how long they will stay at their high, and then when they start dropping.
Good questions!
Here is what we know: Interest rates will peak at some stage. They will stay there for a period, and then they will start to drop back.
Here is what I am paying attention to try to help me answer these questions. The challenge of course, is what will happen next, and that will mean these predictions and trends need to be changed.
I think these are the current key predictors of NZ Home Loan rates.
1) Think ahead and prepare today. If you have a fixed rate rolling off in the next six months, work out your estimate NOW of what the new payments will be. If you don’t know how to do that, ask your Velocity Financial Advisor - we are happy to help. Make the budget and spending changes you need to make early, to ensure you can afford the higher repayments coming up. My observation is that if you give yourself your time, most financial challenges can be worked through.
2) Consider hedging your bets. On the face of it, fixing for 1-year seems too short (i.e., rates may be peaking in a year) and fixing for 5 years seems too long (rates will likely be on their way down then) but we just don’t know. If you split your loan between different periods, whatever happens you won’t be so impacted. We can help working out the ratios on this.
3) If you can afford extra (i.e., you have some surplus income) be smart about what you do with this. Yes, you could increase your mortgage payments (that can be smart, and you can get your loan paid off quicker) but if rates increase down the track, will you need some of that money to aid you being able to make your mortgage payments then? If the answer to that is YES, then consider paying extra in to your Home Loans in a way that allows you to access that money down the track. There are a range of ways you can do that. Ask your Advisor to work with you to find the way that is best for you.
There is quite of lot of scary talk going around at the moment. We can’t predict the future, but we can plan for a range of options to ensure we are best set up to meet whatever comes along.
I hope this is of use. Do reach out to your Financial Advisor. It is our job to help you to get set up in the best way possible.
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.