This after rates jump significantly, prompting increased OCR forecasts
Borrowers who are concerned about the likelihood of soaring interest rates could consider splitting their home loans to spread their risk, according to a Loan Market mortgage broker.
Read more: Interest rate increases fail to lower inflation
Westpac, ANZ, and Kiwibank significantly lifted their rates last week, after Stats NZ reported that the rate of inflation barely moved in the latest quarter. This prompted some economists to revise their OCR forecasts to a peak as high as 5.25%.
Read next: Inflation could return to targeted levels by mid-2024
Bruce Patten, mortgage adviser at Loan Market, said the interest rates forecast was murky and that he expected the Reserve Bank to discover it had increased rates too much and would have to drop them when the nation’s economy sinks into recession, Stuff reported.
Patten said he was “very much telling” his clients to split their loans to spread the risk. He said borrowers might fix part for 12 or 18 months and some for two or three years, particularly if they would have trouble affording a loan at 7% or 8%.
A $500,000 mortgage would cost $1,035 a fortnight over 25 years at 2.5%, and $1,630 at 7%.
By spreading a loan across several terms, borrowers would be able to benefit from some of the cheaper rates available on shorter terms and the certainty of fixing for longer.
Patten said he expected 2023 to be a tough year for many people who came to the end of terms that had been fixed when rates were low.
Chris Tennent-Brown, a senior economist at ASB, said that although fixing for one-year terms had been the cheapest option historically, some of the longer terms now available looked to be good value, Stuff reported.
Tennent-Brown said that despite the expected additional rate hikes if inflation remained higher for longer, the two- and three-year rates had not moved much yet.
“Longer terms give protection and are comparatively low at the moment,” he said. “I thought they would have jumped up and been higher than they are now.”
Gareth Kiernan, chief forecaster at Infometrics, predicted rates to peak near 7% for a one-year term.
“It depends a lot on what the Reserve Bank comes out with in its next statement in November. It’s another six months at least before they reach the peak,” Kiernan told Stuff.
He said a dichotomy could be emerging between people with a mortgage and were experiencing higher interest rates but who had owned their homes for five years or more and were getting by, versus those who had “jumped in and loaded themselves up with debt” last year and the year before.
While those people might struggle, it was still yet unclear how big a proportion of borrowers that would be, Kiernan said.
The Infometrics economist said the central bank would have to change the mindset of businesses to have an impact on inflation.
“They’re very much in the mindset of ‘Costs are increasing, so I can pass it on, and no-one bats an eyelid,’” Kiernan said. “It’s hard to get back to last decade where no-one wanted to put their prices up and risk losing market share. That’s causing a lot of uncertainty.”
Economist Tony Alexander noted, however, that some people’s outlook for home loan interest rates appeared to be too bleak. Alexander didn’t believe rates would raise much more than another 50 basis points, Stuff reported.
