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Interest Rate Rises Not Far Away

Economists are predicting the OCR will rise sooner than expected. What does this mean for mortgaged investors?


1 July 2021

Independent economist Tony Alexander says it’s a 50:50 call on how high interest rates will need to go to resecure low inflation because the economy is running hot. ANZ economists believe the official cash rate (OCR) will begin to rise in February. It had previously predicted the OCR to start rising from August next year.

Predictions interest rate hikes will be sooner than expected have come after the economy burned off recession fears. There are now a new set of challenges as parts of the economy boom.

GDP data for the first quarter of the year shows growth of 1.6% – double the figure most economists predicted. For Alexander that is why as soon as the 2.99% five-year fixed mortgage rate appeared, and through the entire time it was offered, he suggested investors take up the option to fix 100% of their mortgages.

“If borrowers had fixed five years at 2.99% they would be sleeping easy as the five-year rate now sits 0.7% higher and inflation worries rise globally. If facing the decision today the choice would be more difficult. The lowest five-year rate on offer by the lenders I track is now 3.69%.”

Alexander says the average rate to be achieved by rolling over one-year fixed rates for the next five years is 3.4%. This is less than the five-year rate at 3.69%. However, that latter rate gives certainty which the short rate does not.

“Plus, it protects investors against the risk that when the one-year rate is high they panic and [have to] switch to a five-year rate in three to four years which I would not touch with a bargepole now.”

He says overall, if borrowers have not locked into the previous attractive three to five-year rates over the past 12 months, then they have left their run too late.

“If investors are on a rolling one-year fixed … that means they are going to face a big problem when the one-year rate is well above the long-term rates. That will be some time over the 2024-25 [period].”

He says if borrowers are facing a fixing decision today, they should probably have one half fixed one-year, one-quarter three years, and one-quarter five years.


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