Tariffs are in, then they're out, and nobody knows what rates will do next
Kiwis chasing lower mortgage rates got good news this week, as the Reserve Bank cut the OCR by 25 basis points to 3.5%. All major banks have dutifully cut their rates since – however, the global market remains a rollercoaster asUS President Donald Trump’s sweeping tariffs sent the markets into a freefall.
Stuff reported that 4.5% rates could be on the cards in the coming months as a result. Now, stock markets have rebounded as a sudden u-turn on the tariff war was announced.
Amid this chaos, it’s safe to say that the only certainty is uncertainty.
For mortgage advisers, this means a difficult time answering the most common question that clients have – what are interest rates going to do? Hamish Patel, mortgage adviser and owner of Mortgages Online, shared his approach to this uncertainty at the recent Financial Advice New Zealand (FANZ) conference, and he notes that even forecasters only get it right about half of the time.
“The highest I remember was 9%, and I remember fixing at 7.65% for four years,” Patel said. “The GFC followed, and interest rates changed dramatically. I realise that if I try to predict interest rates, I’d probably lose half of my clients.
“One thing I do is not give my opinion on what interest rates are going to do. However there’s a vacuum, because that’s clearly what clients want to know.”
How to navigate the rollercoaster
CoreLogic chief economist Kelvin Davidson expects another 0.25% OCR cut at the next decision in May, and most economists agree. Still, Davidson noted that analysts have “pored over every word” of the Reserve Bank’s brief Monetary Policy Review, and the result is that “uncertainty remains high” and the inflation effects are “not clear.”
Patel said that mortgage advisers play a “pivotal” role in clients’ lives, and so the most important thing isn’t trying to predict the unpredictable - it’s getting a solid sense of what the client needs.
“I usually run 45-minute sessions with clients on structuring,” Patel said. “In that, I get a feeling for the client’s appetite for volatility, their need for certainty, and their ability to put up with interest rate shocks. What clients are really looking for is reassurance, and guidance on how to navigate the unknown when taking on big debt.”
Another useful factor for clients to understand is that in the long run, the bets tend to even out. For advisers, it’s all about getting the client to that long run safely.
“Think of it like this – how many stories have you heard of a multimillionaire always picking the correct fixed rate?” Patel said.
“On the other end, how many people do you know that have done really well with home loans, that have sustainable long-term debt and long-term property hold positions?”
Patel said that this doesn’t mean there are no wrong answers, as this is very much not the case. The best mortgage strategy can vary year to year (or month to month), but getting a solid understanding of the client’s future plans is always vital.
As an example, a client with 10 years left on their loan wouldn’t want a five-year fixed term, as this doesn’t give them enough time to hedge their bets.
“You’ll either get it really wrong or really right,” Patel said. “But if you think about a young couple starting a family, and they know there’s a one-income family on the horizon – fixing most of your loan for one year isn’t a good idea.
“As advisers, we inherently know this stuff, but it’s really about making sure you do that 45-minute to one-hour focus on the structure and listen to the client,” he said.
“You’ll know what the wrong answers are, and once you eliminate the wrong answers, you’ll usually end up with a couple of options.”
