Record low interest rates aren’t coming back: ASB

People with home loans would be prudent to budget on paying higher mortgage rates over the coming years, ASB chief economist Nick Tuffley says.

But though home loan rates would not return to their recent record lows, they would stay below the long-run average borrowers had experienced over the past two decades, he said in ASB’s Home Loan report for May.

Mortgage rates peaked in the global financial crisis (GFC) with floating rate loan rates rising above 10%, data from the Reserve Bank Te Pūtea Matua shows, but ASB did not expect fixed-term home loans to get to that level.

Tuffley expected the Reserve Bank’s official cash rate (OCR) to peak at 3.5%, but he said: “We expect most fixed-term mortgage interest rates will lift to settle within a 5.5% to 6.5% range over the year ahead.”

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ANZ and Kiwibank have already announced home loan rate rises this week, and Tuffley said home loan rates would continue to rise during the rest of the year.

Kiwibank chief economist Jarrod Kerr said in his First View report released on Monday that around half of mortgage holders were rolling on to new interest rates nearly twice what they had been paying.

“It will hurt,” Kerr said, with the pain for households coming from both their higher home loan repayments, but also general inflation pushing up the cost of things like groceries.

The market now expected the OCR to start coming down from whatever peak it reached at the end of 2024, Kerr said.

But there were risks that expectations for the economy turned out to be wrong, which could have an impact on home loan rates.

“If the economic situation changes for the worse, the Reserve Bank has options to maintain current settings for longer, or even lower borrowing costs to support the economy,” Tuffley said.

With so much uncertainty, picking a mortgage strategy to minimise interest costs was easier said than done, Tuffley said.

For individual households, it was not only rate that mattered, he said. Factors like flexibility and certainty were important to some borrowers.

“It’s often not as simple as opting for the lowest rate. Historically the mortgage curve has been ‘tick-shaped’, with short-term fixed rates lower than both the variable and the longer-term rates,” Tuffley said.

With one and two-year fixed home loan rates lower than floating rates, borrowers could obtain some certainty, and a lower rate, simply by fixing their mortgages for terms out to two years, rather than having a floating rate mortgage, he said.

Independent economist Tony Alexander said few people followed his suggestion a year ago to fix their home loan for five years at 2.9%, with most opting for slightly cheaper shorter-term rates.

Having missed that opportunity, he said the optimum strategy was to opt for shorter-term one and two-year rates, and “take the pain”, waiting for the interest rate cycle to change, and rates to start falling again.

“If I were fixing now, I would probably take a mix or one and two years, and ride the curve down,” Alexander said.

Alexander predicted pain for the retail and travel sector as households with home loans trimmed their spending, but he said only a small number of borrowers would find their rates rising higher than the “test rates” banks used to calculate whether they could afford repayments.

People who needed certainty on repayments might choose a longer-term loans, Tuffley said.

But there was a risk that home loan rates might end up peaking, and falling, sooner than expected.

“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,” he said.