Had brunch this morning and had the best hot roast beef sandwich at Five Loaves in Devonport. Yum! The weather was cloudy, cool and breezy – as predicted by the forecast. It was nice to spend an hour ignoring the rest of the world, but today I have to do a little forecasting of my own.
Just before the last Reserve Bank’s official cash rate (OCR) announcement we signalled that the OCR would go up but that long term interest rates looked like they might fall, which they have. The result is an increasingly flat mortgage-rate curve.
A weak global economy and a weaker-than-expected New Zealand economy have both reduced the outlook for future interest rate increases. Property prices have been retreating, consumer spending is still soft (and will get softer), and now immigration is waning. This is consistent with our long-term view of relatively low interest rates.
| Variable | 1 Year | 2 Years | 3 Years | 5 Years | |
|---|---|---|---|---|---|
| Current mortgage rate | 6.25% | 6.45% | 6.70% | 7.20% | 7.75% |
| Wholesale rate | 3.10% | 3.55% | 3.70% | 4.00% | 4.30% |
| Margin | 3.15% | 2.90% | 3.00% | 3.20% | 3.45% |
| Mortgage rate - 30-day forecast | 6.25% | 6.35% | 6.50% | 6.80% | 7.10% |
Over the coming weeks I’m expecting long-term mortgage rates to fall further. These predictions are in the table above. They are based on an observation that the banks are yet to pass on a drop in their cost of funds – no surprises there!
If you’re keen to lock into a longer-term rate, then hold off for now – but it’s nearly time. If and when Kiwis start jumping into fixed mortgage rates en masse then the rates will shoot back up again. The timing of that is awfully hard to predict and – like 2008 – when it happens, it happens fast!
The best value for money at the moment is the two-year fixed at 6.69%, especially when you consider the floating rate is 6.25%. If you need a bit of certainty then the current two-year fixed rate is a good compromise. Don’t get caught up in trying to predict rates – even if that’s what I do! (I don’t try to predict the weather, though.)
Personally, I am going to leave half of my mortgage floating and fix the other half for three or five years depending on rates. I’ll only lock in for five years if it gets below 7.00%. In the meantime the whole thing is floating and I’m in no rush.
I should also point out that I do not currently have a strong view on floating or fixing. I believe rates will stay relatively low for some time. However, each person’s tolerance for uncertainty is different. If you’re worried about rates, then I’d fix part of your mortgage for two years now. If only you could fix the weather when you liked the look of it…
