what will interest rates do in 2013?

Tuesday, December 18th, 2012

When it comes to interest rate predictability this is probably the greatest uncertainty we’ve ever faced. I’m a firm believer that when times are uncertain you should look for certainty and not take risks you can’t afford to take.

economic backdrop

Inflation is likely to keep the Official Cash Rate down for some time to come but borrowers shouldn’t count on this lasting forever.

The risk of a serious financial meltdown in Europe or a hard landing in China’s economy still remains. Plus other variables such as the housing shortages in Auckland and also Christchurch are putting upward pressure on prices. There are also signs the increase in housing demand is broadening beyond these regions. Great news for those with houses to sell who’ve been riding out lower prices waiting for an upturn, but less positive for those wanting certainty when it comes to mortgage interest rates.

Laurie’s prediction

The OCR looks set to remain on hold at historic lows of 2.5% for most of 2013. Many are suggesting the Reserve Bank will steadily increase the OCR from late 2013 but my gut feel is we won’t see any change until early next year, after which we’ll see interest rates begin to rise.

The possibility that the OCR could actually be cut still can’t be totally ruled out but personally I think that’s fairly unlikely.

I think we’ll see fewer fixed rate specials in 2013, competition between the banks will cool and the high level of refinancing activity we saw in 2012 driven by competition is likely to settle back into more normal levels.

fixed rates attractive

Up until recently the shorter fixed rates have stolen the show. The combination of low wholesale rates and favourable funding conditions has allowed banks to now offer fixed-term mortgage rates (up to two years) that are lower than the floating rate and the medium to long term fixed interest rates are also looking more attractive.This provides borrowers with the opportunity to secure lower rates regardless of economic instability.

The longer-term fixed rates (four and five years) provide a good armour against future rate increases, although you would have to be be prepared to pay a bit more (compared to a floating rate or the shorter-term fixed rates).

For borrowers who prefer more flexibility, you can most likely still benefit from the floating rates remaining at 40-year lows until at least late 2013.

what to do?

I see  limited value in waiting to fix, especially if there’s not a lot of headroom in your budget to absorb any increased costs. Those increased costs are coming. It’s a question of when, rather than “if”.

If a 1% or 1.5% rate increase is going to impact on your ability to meet your commitments, or cramp your lifestyle, then you should be doing something sooner rather than later. Faced with uncertainty your best option is to decide on your priorities – all the while factoring in the inevitability that interest rates will be higher in the future.

With five year interest rates finally having dropped below 6% I could be tempted to lock part of my mortgage up at it while keeping the rest shorter. Be mindful though, when considering fixing for so long that you really need to be sure of your future plans – you don’t want to be stung by break fees.

At the end of the day the perfect rate decision is something that will only be known with the benefit of hindsight!