For those clients that have experienced my rants firsthand, or those of you that follow my blog, my view on mortgage rates has been consistent for some time, but most importantly we’ve been getting it right.
If you are new to Squirrel this is a great post [market mispricing mortgage rates]. It was posted back in October 2009 when a number of economists were forecasting rates over 8.50% by the end of 2010.
Over 2009 we spent a lot of our time and emotional energy convincing many of you that mortgage rates would not sky rocket in 2010. In hindsight the only thing we didn’t get quite right was just how quickly the five-year rate would shoot up after it got as low as 5.95%. If you managed to get a five-year rate below 6.50% then you are entitled to feel pretty smug!
Back in October we posted on why mortgage rates wouldn’t go up and we’ve reiterated that view in a number of posts since then. This month the Reserve Bank came out along similar lines and finally bank economists have started to adjust their view. Funnily enough, you’d now think bank economists always got it. Tony Alexander wrote a good piece this week on why the official cash rate and mortgage rates aren’t necessarily connected. His current advice is to stay floating. Good article but six months too late. Funnily enough my recollection (which isn’t that great) is that he was telling everyone to fix for two to three years six months ago. Hopefully no one was listening.
So what is it that everyone is slowly starting to get? Basically that we’re in a big economic hole and there is no easy quick fix. With the mountain of debt we have, we will need low interest rates for the foreseeable future to dig ourselves out. The Reserve Bank will not need to increase mortgage rates to slow things down!
Hell, a couple of scary headlines about property and NZ Inc comes to a grinding halt. Our economy is a bit fragile and there is no quick fix on the horizon.
So, in terms of mortgages, the recipe for now is almost too simple. I’m recommending that you stick with the lowest possible short-term rates but still split your mortgage so that when rates do start to increase you can manage it better. In all honesty even when rates do go up, I’ll be encouraging you to keep your mortgage in short-term rates.
For now I’d be inclined to put the whole thing in floating but there is something in our Kiwi psyche that is still afraid of doing that. At Squirrel we’re encouraging most of our clients into a mix of floating at 5.65% to 5.75%, 12 months at 6.15% and 18 months at 6.49%. I’m loathed to go beyond 18 months as do not consider longer-term fixed rates good value at all.
While mortgage rates are low it is important to set your repayments higher. Put your repayments at a level that assumes interest rates are 9.00%. That way you pay your mortgage off faster for now, and you repayments do not need to change when rates go up. In this environment you need to be paying off debt as fast as you can.
