Scheduled maintenance is planned for June 13 at 4pm, during which time the site will be temporarily unavailable.
.png)
In his monthly blog, Brendon shares his insights on what interest rates are doing and why, and how this impacts homeowners deciding how to best structure or refix their home loans.
On Wednesday 25th May the Reserve Bank increased the Official Cash Rate (OCR from 1.5% to 2.0% (the second 0.5% increase in 6 weeks)
At time of writing at the end of May, a standard 1-year discounted Home Loan rate is around 4.45%, a 2-year rate 5%, a 3-year rate, 5.3% and a 5-year rate is 6% (At the time of writing, banks have not responded to the increase in OCR -but the expectation is this will follow. They may have been slow because the increase had already been “priced in” to the banks rates.)
Firstly – I think given the last 2 years we all understand the perils of predicting what will happen in the economy in the future. There wasn’t a lot of people at the start of 2020 who got things correct!!
So perhaps we need to realise predictions are only made on the best information on hand at the time, and if things change (global pandemics, wars for example) predictions will change things a tad. The Reserve Bank does amend their forecast on an ongoing basis, as life is always subject to change.
The Reserve Bank has amended their forecast and is now saying the OCR is expected to hit 3.4% by December 2022 and will rise to 3.9% by mid-2023 (so that is further rises of 1.9%) After that the RB sees the OCR starting to move down from 2024.
The OCR isn’t the only factor that affects Home Loan interest rates, but it is a key one. It is closely correlated to floating Home Loan rates and for short term (i.e. 1-2 year) rates. There is of course a correlation between the OCR and longer (3-5 year) Home Loan rates, as well as the impact of other external economic factors.
Expect rates to go up by some ways yet. Although the OCR has gone from 1.5% last week to an expected 3.9% mid next year, rates won’t necessarily go up by 2.4% in the next year (that would put a 1 year interest rate at around 7% and higher for the longer rates.) Home Loan fixed rates have already “priced in” some of the predicted movements in the OCR. Let’s hope so anyway!
3 years?
If the predictions are correct, fixing for 3 years may get you through the peak of interest rates.
5 years?
5 years is a long time to fix for and a lot can change in that time, so I would urge some caution in this approach. However, if you can afford the payments based on a 5-year rate and you don’t expect any major changes in the years to come, then this may be an option you would wish to consider so you have certainty of payments for a long time.
1 year?
If this year is going to be a tougher year for you financially (e.g. you may be dropping from two incomes to one) but then you will be better off next year (e.g. maybe a pay increase is expected next year) you may choose to keep payments as low as possible for the upcoming 12 months but could afford to increase them following that. If this sounds like you, perhaps a 1-year Fixed Loan is the way to go. But do remember and prepare for what might be another significant increase in the following year, once that term has expired.
In times of uncertainty “hedging your bets” or splitting your loan between periods is a strategy to reduce changes to your Home Loan payments. So do give some consideration to this.
Right now, there is nowhere to hide from the rising interest rates. If you are refixing your Home Loan (particularly from a 1-year loan, as 60% of NZ’ers with a mortgage are) it is going to hurt, and for some it is going to be brutal.
The team at Velocity can’t make this better (we wish we could!!) but we can work with you to have the best strategy possible and to make sure you get some advice and support as you set your Home Loan up or look at the refix options.
Please get in touch if we can help.
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.
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.