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Back To Reality With A Bump

With the recent OCR increases, and more expected, those who have fixed short-term may be in for a nasty surprise, writes Ryan Smuts

By: Ryan Smuts

1 December 2021

As 2021 draws to a close and we approach the last month of the year, some good news is on the horizon for NZ business being able to open back up and operate from early December.

It will be great to get back to some level of normality for New Zealand and, in particular, Auckland. My guess is that we are likely to see a significant spike in spending in the coming month, particularly due to lockdown causing pent-up demand coupled with the Christmas period typically being the busiest time for retail and hospitality businesses.

When it comes to mortgage interest rates, however, these are heading up, and have been since the middle of the year. With the recent official cash rate increases, and further expected increases, those who have fixed shortterm (e.g. one-year at 2.29%) may be in for a nasty surprise when their rate comes up for renewal in 2022 and their interest costs double. This could have harsh effects on household spending due to borrowers “tightening up their belts”.

As a result, we’d be recommending borrowers get in touch with reality and review their rates sooner rather than later to secure some certainty. Many of our clients have been recently fixing longer terms, assuming it fits their goals and financial position, to hedge against interest rate inflation. It wasn’t very long ago that rates were where they are now, and these higher rates could become the new “normal”.

In more recent weeks we have seen even “special” mortgage rates trend up significantly, with increases from various banks. As it currently stands most banks have three-year rates in the high 3% or mid 4% region (depending on lender, LVR, etc.) which is a far cry from the mid 2% area we saw earlier this year.

To put this in perspective, the median three-year rate is 4.49% currently across banks; earlier this year that was as low as 2.39%-2.49%. On a $1,000,000 loan, this is an increase of $60,000+ over three years alone. For most NZ households this is fairly significant to say the least. This increase is exacerbated when it comes to five-year rates, which had a median of 2.99% and now of 4.85%. This increase is around $93,000 over five years.

When it comes to certain rates offered, some lenders are leading the pack. Heartland, for example, has a lead but has very specific criteria. When it comes to other NZ/Aussie banks, SBS still seem to be very favourable across most fixed terms from one to five years.

My advice is there is certainly no onesize- fits-all model (for bank or interest rate term) so definitely get in touch with your mortgage adviser and figure out what may be best for you and your financial situation.

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