Economists offer their home loan rate picks

Interest rates have risen rapidly over the past year, and the Official Cash Rate (OCR) is expected to rise again this month.

So where does that leave borrowers?

ASB economists said the best home loan rate to choose would depend on individual circumstances.

“Everyone wants to secure the ‘best’ deal on their mortgage,” they said.

READ MORE:
* Is it time to fix your longer-term mortgage loan?
* How high will interest rates be in 2022?
* Rising Mortgage Rates: What’s the Best Repair Strategy?

“It’s easier to say which strategy is better than to do it, given the number of influences that affect mortgage interest rates and the different flexibility and certainty requirements of individual borrowers.”

They said it wasn’t always as simple as opting for the lowest rate on offer.

Right now, the big four banks offer one-year rates of 5.99%, two-year rates of between 6.09% and 6.19%, and three-year rates of between 6.19% and 6.29%. .

ASB economists said they expected fixed rates to peak at between 7% and 7.5% over the next year, while floating rates could hit around 9%.

“However, as is often the case, the outlook is far from certain. Our base expectation is that mortgage interest rates over the next decade will be around or potentially below the long-term averages of the past 20 years, rather than pushing to the higher levels seen before the global financial crisis. ”.

At the moment, you are paying more for certainty.

123RF

At the moment, you are paying more for certainty.

A strategy of fixing for a series of one-year terms has proven cheaper in recent times, but anyone planning to do so would need to budget for periods of higher rates, they said.

ASB Chief Economist Nick Tuffley said some of the long-term fixed could do well.

“Looking at what will provide the lowest cost over the next five years, setting around two or three years now appears to be the cost-minimizing option, based on our view that OCR will hit 5.25%.

“Some considerations for these terms are that if the Reserve Bank cuts OCR before the second half of 2024, our current assumption, borrowers would lose a potential opportunity to benefit before interest rate declines, although a term two years will allow that benefit to occur sooner. But if inflationary pressures continue to prove unexpectedly persistent, then a two-year term will not protect against higher interest rates for three years or even longer.

His colleague, Chris Tennent-Brown, said that before the latest round of interest rate hikes, he thought two-year and three-year rates were low compared to what they should be.

“Now they have risen to exactly where I thought they should be, so they are not as attractive.

“However, pegging between one and three years seems to make sense, given that all forecasters and the Reserve Bank are talking about rates going up and rate decreases being a long way off unless the economy performs very well. worse than expected. Getting a few years of certainty when it comes to mortgage payments, at levels that are around the average of the last 20 years, still makes sense for people looking for certainty.”

Independent economist Tony Alexander said that if he were arranging a loan, he would choose a term of one or two years, based on the expectation that the Reserve Bank could eventually suppress inflation and long-term rates would fall in the second half. of 2023.

Leave a Comment