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Watch Out For The Potholes

One mistake borrowers can make in an interest rate market like this is to simply pick the cheapest, writes Ryan Smuts.

By: Ryan Smuts

1 January 2023

In recent months there have been some increases to rates because of the events overseas, and also domestically.

Locally we have seen our official cash rate (OCR) increase to 4.25 per cent in November, which was a 0.75 per cent increase from the previous 3.50 per cent. This is the largest single increase to the OCR since it was introduced in 1999.

In terms of current residential mortgage rates, most banks’ floating rates (prior to discounting) are sitting in the high 7 per cent to early 8 per cent mark, with fixed rates ranging from the early 6 per cent area for one-year terms to the high 6 per cents for long-term fixed rates such as a five-year rate when looking at specials.

Carded rates are even beyond this, reaching the early 7 per cents.

HIGHER RATES

It is possible that given what’s going on we may see something that doesn’t often happen in the New Zealand market, where short-term interest rates end up cheaper than long-term rates. One mistake borrowers can make in an interest rate market like this is to simply pick the cheapest interest rate as this may mean they are locked in at higher rates for longer than they need to be.

As always your own personal strategy/circumstances would be something to consider in this decision.

Economist commentary and predictions still suggest the OCR will be increased again in February and April this year, which would probably result in further increases to bank floating rates and the test rates they use to assess a borrower’s “affordability”.

We have, for example, recently seen a couple of banks with “test” rates being increased to as high as 8.60 per cent. This makes access to credit even more difficult than before.

ECONOMISTS’ VIEWS

One thing to be aware of is that while we expect to have rates increasing further for some terms (shorter term and floating) it is possible some other terms have had these costs priced in already, which certainly seems to be the view of economists like Tony Alexander.

As I’ve stated in the past, the OCR doesn’t always have a direct correlation to all mortgage rates (fixed and floating), but does have an effect on floating and
short-term interest rates.

What will be of significance to property investors in the future is that these higher interest rates, coupled with the loss of interest deductibility, may well cause significant cash flow pressure. This is compounded when considering it is even harder to get interest-only lending than it was in the past.

Looking forward, cash flow will become extremely important, and this is where discussions with a mortgage adviser will be invaluable.

The structure of your mortgage will ensure you’re making the best out of a difficult (and unpredictable) interest rate environment.

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