The increase of interest rates: concern or natural?
The official cash rate (OCR) is influenced by the Reserve Bank of New Zealand. It’s the OCR that can have major impacts on the interest you pay as a homeowner with a mortgage to your bank. Whilst this rate is very hard to predict, many homeowners and media will turn to professional economists to help gauge the future.
In March 2021, ASB economists suggested interest rates wouldn't rise until at least 2022. Westpac economists went a step further, suggesting a hold on interest increase until 2024.
In May 2021, the ANZ economist said that she didn't think that the OCR would increase until August 2022.
Off the back of these predictions, a consensus between economists was recommending fixing a one-year term for your loan; adding that the cheapest strategy was to continue rolling a year at a time. Given that at the time the interest rates would likely increase a year down the track, this was a popular and sensible move.
What happened was an official cash rate increase in October of that year, less than seven months after the predictions were made.
Independent economists, like Tony Alexander, pitched in with their suggestions advising that spreading the interest rates over one, three and five years was the right move. However, Alexander also predicted back in May 2021 that the one-year rate in June of 2022 would be sitting at 2.8%. It’s now at 4%.
The point being these predictions were wildly off target to what we’re seeing today. It is tough for economists to get it right, tougher for homeowners to watch these increases occur.
History tells a better story
The Reserve Bank website shows a graph that is very timely as we approach the midway mark of 2022.
In this, you can see the interest rate rising over the last 20 years. Focusing on the red line, which identifies the two-year fixed rate, you can see that the mid-2021 period increased the fastest it has in over 15 years. No one predicted this.
Many borrowers came off low interest rates not expecting such an increase. Fast forward to today, and interest rates are around twice what they were paying. This is daunting to anyone, however it’s worth diving deeper into the graph.
The average interest rate since 2012 (focusing on the last decade) is 6.3%. This means that even today, we’re still well below the ten-year average. Beyond that period - 20 years - we’re again well below the average.
History tells us that there is no need to panic. We can still focus on good financial hygiene though. Remember to review budgets, look at making sure payments on council rates and insurances are dealt with first, then getting fuel in the car, food on the table and scrutinizing your discretionary expenses.
Two-year fixed rates
Everyone’s circumstances are different. Advice on re-fixing depending on interest rates needs to be taken with a grain of salt; it’s unique to you.
Most economists are now starting to verge on recommending a two-year-fixed rate off the back of generous interest rate increases. Going long term probably means you’re paying more for unnecessary certainty. The two-year window is about the time frame that economists expect the rates would have peaked, and perhaps to even come down by then.
Your decision on what to do comes off the back of the environment at the time, one influenced on the assumption rates will come down. But, as we know from early 2021, interest rates are very hard to predict. So, without fail, the best strategy to employ is one that’s unique to you, your financial situation and confidence in the timeframes you’re working with. Don’t just collectively rely on economists in the media.
A two-year fixed rate appears to be the current sweet spot.
The key point to remember is individual circumstances, tolerance of uncertainty and your future all need to be taken into account when making decisions on which rates and terms are suitable for you.
Please be aware this is general advice and not specific to you personally. Should you need any specific tailored advice please call Loan Market Metro today.