Interest rates have risen rapidly over the past year, and the official exchange rate (OCR) is expected to rise further this month.
So where does that leave borrowers?
ASB economists said the best home loan rate to choose would depend on individual circumstances.
“Everyone wants to get the ‘best’ deal on their mortgage,” they said.
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“Determining which strategy is best is easier said than done given the number of influences that affect mortgage interest rates and the differing demands of individual borrowers for flexibility and certainty.”
They said it wasn’t always as simple as going for the lowest rate offered.
Currently, the big four banks offer one-year rates of 5.99%, two-year rates between 6.09% and 6.19%, and three-year rates between 6.19% and 6.29%.
ASB economists said they expect fixed rates to peak between 7% and 7.5% over the coming year, while floating rates could reach around 9%.
“However, as is often the case, the outlook is far from certain. Our baseline expectation is that mortgage interest rates over the next decade will be near or potentially below the long-term averages of the past 20 years, rather than rushing to the higher levels seen before the global financial crisis.
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At the moment, you pay more for certainty.
A strategy of fixing a series of one-year terms has proven to be the cheapest lately, but anyone considering doing so should budget for higher rate periods, they said.
ASB chief economist Nick Tuffley said some of the longer-term fixes could work well.
“Looking at what will provide the cheapest cost over the next five years, fixing around two or three years at the moment seems to be the cost saving option, based on our view that the ‘OCR will reach 5.25%.
“Some considerations for these terms are that if the Reserve Bank were to reduce the OCR earlier than the second half of 2024 – our current assumption – then borrowers would miss a potential opportunity to benefit earlier from lower interest rates, although a two-year term will allow this benefit to occur sooner.But if inflationary pressures continue to prove unexpectedly persistent, then a two-year term will not protect against higher interest rates as well. longer than a term of three years or even a longer term.
His colleague, Chris Tennent-Brown, said that before the latest round of interest rate hikes, he thought two- and three-year rates were low compared to where they should be.
“Now they’ve risen to exactly where I thought they should be, so they’re not as appealing.
“Nevertheless, a one- to three-year peg seems logical, given that all the forecasters and the Reserve Bank are talking about rate hikes and rate cuts are far from possible, unless the he economy is performing much worse than expected, and getting a few years of certainty on mortgage payments, at levels close to the average of the last 20 years, still makes sense for people looking for certainty.
Independent economist Tony Alexander said if he set a loan it would go for one or two years, based on the hope that the Reserve Bank would be able to suppress inflation eventually and that long-term rates would fall in the second half. of 2023.