With interest rates constantly rising, the challenge for borrowers is to determine what is the best lending strategy. Two banks give their opinion.
Wednesday, March 23, 2022, 2:55 p.m.
Westpac’s acting chief economist Michael Gordon said wholesale interest rates are now broadly in line with banks’ forecasts of an official cash rate of 3% by mid-2023.
“This suggests that there is more benefit to fixing for longer durations,” he says.
All economists agree that interest rates will continue to rise, and Gordon suggests that fixing and rolling for one-year terms is likely to lower the cost of borrowing on average over the next few years.
“Longer fixed terms are more suitable for those who want certainty in their repayments.”
ANZ takes a similar view. It’s the economists who say choosing a term “hasn’t been easy for some time.”
“If there had been a realistic chance of mortgage rates falling, for example, fixing for a shorter period would not only cost less now, but also cheaper in the long run.”
They say that with interest rates rising, most borrowers face moderately higher costs now, or a mix of lower costs now but possibly much higher costs later.
“Ultimately, what borrowers choose is likely to be guided by their appetite for risk and/or their desire for certainty.”
They predict that OCR will increase another 1% by June.
“But that’s not guaranteed – a slowdown in the housing market (or the global economy) could, for example, reduce the need to increase OCR.”
“But we wouldn’t bet on that, given the inflationary backdrop.”
He says a simple budget analysis is likely to be helpful for borrowers worried about affordability.
“For example, if you can comfortably afford 4.59%, but think you may have to make tougher choices if your mortgage rate goes above 5%, you might prefer a two- or three-year term. cheaper in a year, given that the OCR could be at 3% when it’s time to refix in a year, by which time fixed mortgage rates could all be back above 5%.
“Adding a break-even analysis to the mix could also help, as it gives you an element of comparison with future expectations. Consider, for example, the choice between a one-year fixed rate of 3.99% or a two-year rate of 4.59%.
Over a two-year horizon, consecutive one-year fixes will end up being cheaper if the one-year rate is below 5.18% yoy.
If the OCR heads above 3%, it is possible that one-year rates could reach 5.18%. In this case, borrowers may prefer to opt for the added certainty of a two-year rate.
“It would cost more now, but it could cost less in the long run.”
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