Rates are rising, so it might make sense to fix a little longer.
A two-year mortgage term may be the best option to provide a good interest rate, but also enough protection against further hikes, one economist says.
ASB senior economist Chris Tennent-Brown said fixing for a series of shorter terms was often the strategy that provided the lowest interest rate costs on a mortgage overall.
But, he said, anyone taking a one-year rate now because it was the cheapest in the market – from 5.19% to 5.35% on special at the main banks – would need to be prepared to face potentially higher rates next year.
He said it was possible that a borrower fixing for one year now could find their loan had to be refixed at about the peak of the Reserve Bank’s hiking cycle.
“A one-year rate may well mean you’re rolling into higher rates in 2023. A two-year rate might mean you are rolling off into a similar or slightly more comfortable interest rate environment.”
He said, for a not-much-higher interest rate, people could fix for two years and have more certainty. Advertised two-year rates are between 5.39% and 5.45%.
“The cost of fixing for two years is still low compared to the average rates of the past 20 years. Fixing for a couple of years to give some certainty over a period when the Reserve Bank and other central banks seem pretty intent on raising rates certainly comes at a reasonable price compared to where longer-term rates have got themselves to.”
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He said borrowers who fixed for two years could hope that at the end of that period, inflation was more under control and the picture would look better for borrowers.
“It’s always the case that mortgage rates could dip lower, due to anything from Reserve Bank actions through to renewed threats to the economic outlook. But right now the risks are strongly skewed to higher mortgage rates over the year ahead.”
But he said the significantly longer-term rates were less appealing. “Five-year rates look quite expensive compared to what I think the short-terms will end up being.”
Four- and five-year rates were close to their 20-year averages and were not expected to lift much further, he said.
“Fixed-term mortgage rates are between 2.4% to 4% above the lows available during the pandemic. ASB forecasts suggest rates will continue to lift from current levels over the year ahead for the shorter terms, but we may be near or at the peak for longer fixed-term (four- and five-year) rates. Shorter fixed terms are still available at levels below the long term (20-year) averages but have risen incredibly quickly from last year’s lows.”
ASB expects the Reserve Bank to lift the official cash rate to a peak of 3.75% in its efforts to slow inflation.
But Tennent-Brown said it seemed the central bank was increasing rates faster than predicted, and the peak could be reached earlier than first though. Rates could then start to ease back to levels like today’s.
Before the pandemic, the Reserve Bank had proposed a new regime for bank capital requirements that would have put upward pressure on mortgage rates.
The changes were delayed due to the pandemic but will be phased in over the coming years.