Time To Look At A Hedging Strategy
With the rising cost of borrowing it may make sense to adopt a hedging strategy, writes Ryan Smuts.
30 September 2022
The cost of borrowing is still increasing, generally speaking. In September there were some increases as a result of events in the United States because there was an expectation inflation would be lower.
However, given the result was higher, this (much like what is happening in New Zealand) puts upward pressure on interest rates.
In NZ we have seen the floating and half-year rates increase in the last month as a result of the previous official cash rate (OCR) review, and it is still widely expected we will see borrowing costs increase between now and the end of the year.
Until recently there had been consensus between economists that our OCR would peak around 4 per cent, and the expectation was that it would be this year (0.5 per cent for each of the next two reviews from our current 3 per cent).
However, in mid-September ANZ’s chief economist announced they have changed their view with the expectation the peak will be around 4.75 per cent, with three 0.25 per cent increases in the first half of 2023.
This was not long after ASB’s announcement they expect to see the OCR peak at 4.25 per cent.
Money In The Pocket
With the rising cost of borrowing it may make sense to adopt a hedging strategy that allows you to take advantage of lower interest rates if they come, while also allowing certainty in the event we see rates continue to increase during the 2023 calendar year.
Most main bank interest rates range between 5.15 per cent for one-year (usually the lowest) to the high 5 to early 6 per cents for a five-year rate, particularly when taking into account special rates.
At the moment most NZ banks are pricing below the “big four” Australian banks, so it may be worth considering switching lenders if feasible. You may end up with not only a lower interest rate, but in some cases when including a cash contribution, money in your pocket once you’ve transferred.
Cost isn’t the only thing to consider when it comes to reviewing your mortgages; in many cases if you do move the process is a great time to take a fresh look at how your property investment portfolio is set up.
Examples of things to consider include releasing properties which the bank doesn’t actually need to hold as security and potentially extending loan terms and interest-only periods which may help cash flow.
With uncertainty in the interest rate market there is always the question of what the best interest rate is, and in some cases this may not necessarily be the lowest one you see today.
Your risk profile and personal circumstances need to be considered, along with your plans for the future so that you’re able to use the debt that you’ve got to work for you and benefit your financial future.
Talking to a mortgage adviser who can understand this process and give you advice would go a long way in an environment like this one.