Short term fixed mortgage rates have started to increase in anticipation of a June increase in the Official Cash Rate which now looks almost certain.
Some of the key factors behind this are a lower unemployment figure and strong commodity prices signaling that the economy is recovering. The RBNZ has always talked about increasing rates in the second half, so all that has really happened is that we now have a firmed up date – June 10th.
Alan Bollard has described it as easing off the accelerator as opposed to hitting the brakes. This is consistent with a gradual increase in rates, especially given (1) long-term fixed rates are already high and (2) a large chunk of the market will reprice as rates rise. Key message – don’t panic!
Consumer spending, the housing market, and wages (except Chief Executives) are all subdued. Even with some recovery in commodity prices our farmers are fairly bruised. Any additional money will go into paying off debt and deferred maintenance. The thought of increasing interest rates will send a chill down the back of most farmers and businesses. Hence why the Reserve Bank will tread lightly. Lets not talk up the recovery too much – the world is still a huge mess!
Mortgage Rate Forecast
The mortgage rate forecast we did at the start of the year still looks to be on the money. If anything I think our previous forecast is a bit aggressive on the rate increases from June onwards. My view now is that we will see three to four 0.25% increases over the next 12 months. To put that in context, under my scenario the average floating rate will increase from 5.75% to 6.75% in the next 12 months. On a $400,000 mortgage that equates to an increase in your repayments of $250 per month.
If you have been following our mortgage advice over the past 12 months the impact will be nil as we have actively been encouraging everyone to set higher regular repayments anyway, based on mortgage rates of 7.50%-8.00%.
What Mortgage Rate is Best?
The 1 year implied mortgage rate is now up to 8.25%. My view is that in 12 months the 1 year mortgage rate will be 7.50% max, and possibly lower. My view implies that longer term fixed mortgage rates are way over priced. With the 18 month rate increasing towards 6.80% I feel floating is the best value-for-money. If you are a bit worried about increasing mortgage rates (in the short term) then consider splitting between a floating rate and an 18 month fixed rate.
In the short term the 1 year and 18 month fixed rates will probably increase further because I sense Kiwis will rush out to fix – it’s in our nature! That will put swap rates under a bit of pressure, so we could see the 1 Year rate hit increase a bit further (maybe towards 6.75%.)
Need Better Advice?
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