The end of the record low interest rate era is looming, but borrowers shouldnt worry about being hit with a sudden, steep jump in costs.
ASB increased its interest rates on three- to five-year home loans on Friday, as expectations of a global economic recovery strengthened.
The move came after a long period of record low interest rates. This pre-dated Covid but was heightened by the Reserve Banks Covid response, including its quantitative easing programme and cutting of the official cash rate (OCR) to 0.25 per cent.
Following ASBs move, economists said shorter-term fixed rates of one- and two-years were unlikely to rise this year, but it has raised questions about what the future holds for interest rates and for borrowers.
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ANZ chief economist Sharon Zollner said there was global pressure on longer term rates at the moment and the Reserve Banks quantitative easing programme had done its dash.
That meant it was likely interest rates had hit the bottom of the current cycle and, for mortgage borrowers, rates now were probably as good as it gets, she said.
But we dont expect the Reserve Ban to lift the OCR until at least the end of next year. If past patterns hold, that means that we are unlikely to see any material change in floating or 1-year rates for at least another year.
While they werent forecasting short-term rate rises and picked that any increases in longer-term rates would be gradual rather than steep, there was no guarantee of that, Zollner said.
Mortgage borrowers can hedge rate rise risks by putting some longer term fixes into the mix, ANZs Sharon Zollner says.
Central banks are not expected to raise rates aggressively, but inflation pressures are building. Theres a tail risk there and they may be forced to raise them more than anticipated.
For that reason, borrowers should think about the implications of this for mortgage rates over the coming years, she said.
Borrowers who are worried about the potential for higher mortgage rates can hedge this risk by adding some longer term fixes into the mix.
If one takes a longer-term view with the aim of lowering interest costs over the next five years, rather than the next two years, it becomes less about where 1-year rates might be in a years time and more about where, say, 2, 3 or 4 year rates may be next year.
The expectation is now that rates are likely to go up from here, Infometrics’ Gareth Kiernan says.
Infometrics chief forecaster Gareth Kiernan agreed that while there was some upward pressure on longer-term rates at the moment, that was not the case with short-term rates.
Ongoing economic uncertainties due to Covid meant the Reserve Bank was keen to keep interest rates low, but there had been a shift in economists expectations, he said.
Previously, the expectation was that rates could go down even lower, but now most would agree that the most likely direction for rates from here is up, although it would be a gradual rise rather than a rapid one.
A sharp jump up of a couple of percentage points could prove a problem for many highly-leveraged mortgage holders who had borrowed at the peak of the market, Kiernan said.
But for people who bought property over the last nine months or so the banks would have factored a higher rate than normal into their servicing criteria, so there is a bigger margin there.
Additionally, for most borrowers on shorter-term fixed rates, if short-term rates did inch up a bit later in the year the rates they would need to refix at would probably still be lower than they were a year ago, he said.
