Borrowers worried about the prospect of rising interest rates might consider splitting their home loans to spread their risk, says a mortgage broker.
rates jumped significantly at Westpac, ANZ and Kiwibank last weekafter Stats NZ revealed that the inflation rate was barely changed in the latest quarter.
That prompted some economists to revise their predictions of the official cash rate peak to 5.25%.
Loan Market mortgage adviser Bruce Patten said the outlook for interest rates was murky. He said he hoped the Reserve Bank would find that it had gone too high and would have to lower rates when the country entered a recession.
* Was life really harder in 1990, the last time inflation peaked?
* How to Lower Your Rent: Ways to Prove Your Landlord Is Overcharging You
* Inflation hits home: 34 fixed-term mortgage loans increase
He said he was recommending his clients to split their loans more than ever. They could settle some for 12 or 18 months and some for two or three years, he said, particularly if they were borrowers who would have trouble paying a 7% or 8% loan.
At 2.5%, a $500,000 mortgage would cost $1,035 a fortnight for 25 years. At 7%, it is $1630.
Spreading a loan over a series of installments meant they could benefit from some of the cheapest rates available on shorter terms and the certainty of locking in longer.
“I’m telling clients a lot to spread the risk.”
He said he hoped 2023 could be a tough year for more people as they reach the end of deadlines that had been set when rates were low. “Only then will we really see the impact.”
Chris Tennent-Brown, senior economist at ASB, said that while setting a one-year term series had historically been the cheapest option, some of the longer terms now being offered appeared to be good value for money.
ASB’s three-year rate was still below 6% on Tuesday. Tennent-Brown said that while interest rates were expected to be higher if inflation stayed high longer, two-year and three-year rates hadn’t moved much yet.
“Longer terms provide protection and are comparatively low at the moment. I thought they would have jumped and been higher than they are now.”
Economist Gareth Kiernan, chief forecaster at Infometrics, said he expected rates to peak near 7% over a one-year period.
“A lot depends on what the Reserve Bank puts out in its next statement in November. It will be another six months at least before they peak.”
He said a dichotomy could arise between people who had a mortgage and were experiencing higher interest rates, but had owned their homes for five years or more and were getting by, versus those who had “jumped in and loaded up on debts”. last year and the year before.
Those people could struggle, but it was not yet clear what proportion of borrowers that would be, he said.
He said the Reserve Bank would need to change business mindsets to have an impact on inflation. “They’re very much in the mindset of ‘Costs are going up, so I can pass it on and nobody bats an eye’… It’s hard to go back to the last decade where nobody wanted to raise their prices and take a chance. losing market share. That is causing a lot of uncertainty.”
What does the official exchange rate mean?
But economist Tony Alexander said some people seemed too pessimistic in their outlook for home loan interest rates.
He said he didn’t think rates would rise much more than another 50 basis points.
Canstar data shows that, in the week of the inflation update, four providers raised five variable rates by an average of 50 basis points. They raised 34 fixed rates by an average of 26 basis points.
Two banks raised the interest rates on two savings accounts by an average of 45 basis points, and one raised the rate on its bonus account by 40 basis points.
Six providers of term deposits raised interest rates by an average of 21 basis points.
New Zealand Bankers Association Chief Executive Roger Beaumont said banks set rates based on their funding needs and the price they could get it for.
“What happens in the market will affect how banks set interest rates.
“They will take into account the official cash rate and the cost of other funds, including wholesale funding often from abroad and retail funding often from local deposits.
“That’s particularly the case with loan rates, where fixed and variable rates can be affected differently by the cost of short-term and long-term financing,” he said.