DATE: 05/03/2014
CATEGORY: Blog, Interest rates, NZ Economy

interest rate hikes and belt tightening…

belt-tighteningWith the first two months of the year already behind us, like me, you’ve probably managed to work off some or all of that Christmas cheer and the belt is feeling a bit looser.

But belt tightening of another kind is looming. Every week there is more and more media hype about rising interest rates. But it’s not just hype. It’s real. The much talked about interest rate rises are coming – and soon. The $64k question now is how much will interest rates rise and how far we’ll have to tighten our financial belts.

The best prezzie I got at Christmas was the latest update for my crystal ball interest rate forecasting software.

Gazing into my trusty crystal ball, when the RBNZ makes its next OCR announcement on 13 March I see a 25 basis point hike. I then see the beginning of a substantial hiking cycle with the OCR increasing by 200 to 225 basis points over an 18 to 24 month period.

That means that within 24 months we could see advertised floating interest rates of around 8%. Scary stuff if you haven’t fixed your interest rate and have little room in your budget to absorb rate increases.

But will fixed interest rates rise in tandem with floating rates?

Some of you may remember the days not so long ago when floating interest rates sat above fixed rates. For the past few years however we’ve seen the reverse. Many Awesome clients have been enjoying discounted floating interest rates of around 5% to 5.25%, while mid to longer term fixed interest rates have been around 6% and higher.

My take is that over the next 12 to 24 months we’re still likely to see attractive shorter term fixed rate “specials” on offer (e.g. one year) driven primarily by competition between the banks. When interest rates rise people tend to go for the lowest cost. Already many borrowers are fixing for shorter terms and banks are likely to fiercely compete to retain these fixed rate loans when they expire over forthcoming months. I expect shorter term fixed rates will remain more attractive than longer term rates which already price in further increases in the OCR.

Another reason for my view is that with the RBNZ high loan to value ratio (LVR) speed humps in place bank lending volumes are significantly down and I think likely to remain so for a while yet. If house sales volumes fall further and fewer new mortgages are up for grabs, how will banks bolster their lending volumes? By offering special deals and enticing refinancing from other banks. Now more than ever banks need to hang on to and attract below 80% LVR mortgages –  the greater number on their books the greater the capacity to approve mortgages for borrowers with a deposit of less than 20%.

A word of caution, if you’re going to fix do so without delay because the moment the first OCR rise happens those who have left it until the last moment to think about their mortgage will rush to fix. This in turn is likely to tip the supply/demand scales and cause a temporary spike in interest rates.

So my bottom line is that you’ll most likely be better off fixing shorter term and to continue rolling over shorter fixed terms of one year. If however there’s little wriggle room in your budget, or if you’re likely to suffer sleepless nights without longer term peace of mind then my current pick is to lock in a rate for three years.

Posted in Blog, Interest rates, NZ Economy

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