Mortgage Rates | Forecast after July OCR

My personal view is the official cash rate (OCR) should not increase. Sure, a few statistics are pointing in the right direction but if you look more broadly I don’t see a recovery: In New Zealand, core retail sales are still weak and the same is true globally:

• The Baltic Dry index (which measures global shipping trade) is near its lows of 2008.
• In California, state employees are taking massive pay cuts.
• Across Europe, governments are also pushing out a wide range of austerity measures (reducing spending.)
• Meantime, closer to home, how many empty cities can China build before a wheel spins off the growth machine?  A recent study estimates that there are 64 million empty properties in China!

A weak global outlook has seen longer term fixed mortgage rates decline over the past three to four weeks.  The basis of this fall is a wider acceptance that any recovery is going to be slow and long. In other words there will be no need for interest rates to increase as quickly as many in the market had been predicting. As we have been saying consistently for 18 months - we are in for a sustained period of relatively low rates. Overall I think the current two-year mortgage rate at 6.95% is good value for money if you’re a bit nervous about rates or managing a tight budget. I’m sticking with floating at 5.95% but would consider a two-year rate if it got to 6.50% or a three-year rate if it dropped below 7.00%. My view is that the RBNZ will increase the OCR again at the end of July. It is a close call but I think they’ll want to put another increase in before sitting back for a while and “reflecting.” That means an OCR of 3.00% and floating mortgage rates of 6.25%. After this OCR increase I think we’ll see the RBNZ step back to see how the economy plays out over the next six months. My view is that we will not see a rapid succession of rate increases.  Short-term mortgage rates will increase. The one-year rate is likely to go to about 6.60%. The two-year rate might stay fairly steady at 6.95% but that will rely on the RBNZ looking reluctant to push rates up further this year. The longer-term rates are unlikely to change so the three- to five-year rates will hover around current levels, 7.25% to 7.75%. If we’re lucky these could decrease slightly. Looking at implied forward rates suggests that the five-year rate is still overpriced. I think it would be good value at anything below 7.25%.

Implied rates

The graph below shows how market pricing implies that the one-year fixed mortgage rate will increase over the next four years. I’ve compared the market view from one month ago with now and with my view of future rates. Based on my view of rates, if you’re game enough to wait you might yet get some lower long-term fixed rates. 

Structuring the mortgage

I’m all for keeping it simple. My mortgages are split 50/50. At the moment everything is sitting in floating but I will ultimately fix half for 2 or 3 years but rates need to fall a bit further first. From my perspective I’m enjoying having low mortgage rates and paying off debt that much faster. Splitting the mortgage gives me a bet both ways in terms of future rates and also helps smooth out any rate increases as my entire mortgage is not repricing at one time.

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