On the 12th March the Reserve Bank decreased the Official Cash Rate by 0.50% from 3.50% to 3.00%. It is a dynamic world out there so we’ll keep amending this blog entry as banks respond to the OCR change.
What does it mean?
We have almost reached the bottom of the interest rate cycle, but that doesn’t mean you need to feel compelled to rush in and fix your mortgage.
There appears to be a bit of panic out there the past two days with a view that rates will suddenly go up again. This is a ridiculous argument – (1) rates have only just fallen and (2) we are in the middle of a major recession! Read Don’t Panic about Rates!!!
We are along way away from the Reserve Bank wanting to tighten the economy by lifting rates. Interest rates (particularly long-term rates will jump around a bit in response to the market and that means from time to time they may go up.)
What we are seeing at the moment (big jump in 5 year fixed rate to 7.50%) is the result of a massive volume of switching out of variable into longer-term fixed rates. The market simply cannot cope with these sudden volumes and rates go up. Supply and demand. It will settle down again in the next few weeks and rates may drift down a bit.
If you have your mortgage in floating then over the next 6 weeks you should start to consider fixing it – even if it is only for a short 6 month to 2 year term. ANZ has a 3 month rate at 5.65% and ASB has 5.50% for six months; both looks pretty attractive for those staying with short-term rates. Floating rates are generally higher than short-term fixed rates because banks take higher margins on these products. However there is no rush to “fix” short-term rates and you might want to wait until the April OCR before jumping in.
How Low will Rates Get?
Interestingly bank margins have fattened up over the past month. Forget the “PR” spin that the rate cut had already been passed on! Kiwi Bank usually leads the rate charge but is decidedly quiet this time round. Seems they are having major capacity/service issues and not coping with volume growth. Where is a bit of competition when you want it! In the “absence” of Kiwi Bank, I suspect the banks are happy to keep higher margins and we might see a cozy oligopoly emerge for a while. Maybe Kiwi Bank will surge back in the Winter once the housing market slows down! I still think we will see a short term rate with a 4 in front of it but maybe not until April – it will be too hard for one of the banks to resist! (Short-term rates have started to fall a bit … not unexpected. )
We blogged on Interest Rate Strategies back in February and these strategies still hold true. Short term rates are likely to stay low for the next 2 years while we fight our way out of recession. They might jump up a bit off their lows but I’m not expecting the Reserve Bank to consistently start “tightening” for at least 2 years. That means low interest rates for a while. You could consider making the most of low rates and lock in some 2 and 3 year fixed rates.
Long-term rates have reached their lows and if you want/need certainty then consider locking in now. The only issue will be, in my opinion, a 5 year fixed rate is not long enough to get you through this cycle. The risk, as always, is that the 5 year matures near the top of the next interest rate cycle. That is why if you go for a long-term rates, always split your mortgage. 
The graph above shows that from the last “bottom” we didn’t reach the peak again for 9 years. Just as important – rates didn’t systematically start increasing until June 2003 so a 5 year rate at this point would have been close to perfect. I believe we are still 2-3 years away from our equivalent of “June 2003.”
Locking in long-term rates is a good strategy if interest rates keep you awake at night (but not the only strategy.)
My personal preference is to do some shorter term rates now and then lock in for 5 years once rates start to consistently increase – by which time the 5 year will be around 7.50%-7.80%. A good strategy should keep you away from rates above 8.00%.
The most important thing to take on board is splitting your mortgage into multiple fixed rates so it does not mature all at once. That is the only way to guarantee you don’t get your rate selections completely wrong!
Who are we?
JB managed mortgage interest rates as a former General Manager at ANZ National Bank and was directly responsible for over $40 billion of bank mortgages and deposits.
Squirrel is an independent Mortgage Broking and Advisory business. We are happy to help you get the best out of your mortgages whether that is buying property, refinancing or simple restructuring everything to make it work better.
