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Hope on the horizon

Lower than expected inflation may provide the impetus for lower interest rates in the longer term. Ryan Smuts explores this possibility, and the OCR increase.

By: Ryan Smuts

1 May 2023

The first quarter is well and truly over and we started off the second quarter with an increase to our OCR by 0.50 per cent on April 5.

At the time of writing not all banks have actually passed this on to clients, with only two banks having increased their floating rates and short-term fixed rates (six months-24 months), being Westpac and ANZ.

ANZ have decided to keep their long- term interest rates the same (3-5 year) while Westpac have actually decreased theirs to 5.99 per cent, for special rates.

When you have an inverted interest rate curve like this, it is usually due to the fact that there is a market expectation that we will see interest rates decrease in the mid-term.

SHOP AROUND

It can be tempting in situations like this, where the long-term interest rates are cheaper, to fix long-term. In many cases this may not actually be the best approach. Your interest rate strategy needs to be determined around what your goals actually are, more than how cheap a particular fixed term is.

While only two banks have increased their rates, it is possible that others will follow, so it makes sense to shop around and get on to reviewing your mortgage as soon as possible before we have any further increases.

Small differences in interest rates and loan structure can mean dramatic differences in actual interest costs paid. They can save you thousands of dollars over the life of your mortgage and cut off several years so that you pay it down a lot quicker than the standard 30-year term.

Discuss your situation with a mortgage adviser to determine what options are available and which may be most suitable for you.

OCR UPDATE

While the OCR may be at its peak (or if not, very near it, depending on which commentator you’re listening to) we have a long way to go before we have inflation under control. Recently we have had the stats for the quarter to March 2023, which have come in at 6.7 per cent. This is lower than the forecasted 7.2 per cent by market pundits, and definitely a step in the right direction.

Reserve Bank New Zealand rhetoric indicates they are heavily focused on getting inflation back into their mandated 1-3 per cent range, and it’s clear that this is their number one priority.

Given the changing interest rate environment, now is a good time to review your mortgages, hopefully the lower inflation means lower interest rates are on the horizon – however the OCR is unlikely to be reduced in the short-term, so it’ll be interesting to see how this plays out.

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