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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. The key factors behind this are:
These two factors signal economic recovery. The RBNZ has always talked about increasing rates in the second half, so all that has really happened is that we now have a firm 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. So the Reserve Bank will tread lightly. Let’s not talk up the recovery too much - the world is still a huge mess!
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% to 8.00%.
The one-year implied mortgage rate is now up to 8.25%. My view is that in 12 months the one-year mortgage rate will be 7.50% max, and possibly lower. My view is that longer-term fixed mortgage rates are way overpriced. 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 one-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 one-year rate hit increase a bit further (maybe towards 6.75%.)
If you are buying a new home then think about using squirrel. Given the amount of money you are investing in your property you deserve the best possible financial advice. Even if you are pre-approved by the bank directly we can still do the mortgage structuring and negotiate rates. Advice is where the rubber hits the road. In the medium term it can reduce your interest costs by 20%. Working with experts is also a great way of getting peace of mind. With a better understanding of your finances, you won’t break into a sweat every time mortgage rates increase or decrease! Apply Online
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