Rising mortgage rates: what is the best fixing strategy?
According to economists, crafting the best mortgage rate strategy isn’t as straightforward as it was six months ago.
Banks continue to raise mortgage rates at a rate that has been described as surprisingly fast.
Westpac raised its special rates by up to 30 basis points this week, taking its three-year special rate to 4.49%. The BNZ raised its three-year rate to 4.39 percent.
ASB Chief Economist Nick Tuffley said that while fixing for one year and then moving to another one-year term has traditionally been the cheapest way to manage a home loan, there are now had more considerations for borrowers.
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“Setting the cheapest, shortest terms and renewing fixed-term mortgages subsequently has been a good strategy. However, this approach could be compromised by the prospect of a rapid rise in OCR and mortgage rates over the coming year, and for those who apply this strategy, the prospect of higher future rates should be budgeted for. .
“Setting some of the longer-term maturities provides certainty about interest rates for the next several years, but at a higher cost than cheaper short-term rates. For those who want that longer term interest rate certainty now, the cost of fixing it over two to five years is still very low compared to the last twenty years.
The SBA now expects the official exchange rate (OCR) to peak at 2%, from the current 0.5%. This meant that most fixed rates on home loans would be between 4.5% and 5.5%, he said.
“The implication of this is that we will see the rates become much higher than they are now,” Tuffley said. He said long-term rates had already risen by up to two percentage points so far this year.
“You have to think more about the risk and the reward – how much is it worth for you to purchase insurance against even higher rates? At the moment, based on all the calculations we do, it still looks like relatively shorter terms will generally pay off, but [interest rates] could increase even faster.
He said mortgage rates are still expected to stabilize around “historically low” levels.
Gareth Kiernan, chief forecaster at Infometrics, said predicting interest rates was “an inexact science.”
But, he said, starting with a one-year rate of 3.3% and a two-year rate of 3.9%, the one-year rate is expected to reach 4.5% in November of the next year to be worth fixing for two years. now.
Kiernan said a 4.5% one-year rate would require an official 2.25% cash rate.
“Assuming the Reserve Bank raises the OCR to 0.75% on the next review, it should increase the OCR to six of the seven reviews next year. Given that there were several forecasts of a 2% OCR before the release of labor market data on Wednesday, the certainty offered by the two-year rate should be closely scrutinized by people whose mortgage is. about to be reattached.
The low unemployment rate is adding to the pressure on the job market, which could fuel inflation that is already beyond the comfort zone of the Reserve Bank.