Financial markets do not like uncertainty or instability. Being such a blip on the economic world stage NZ is strongly influenced by what the markets are doing overseas and economists get very nervous when they see the big players like the US show signs of volatility.
The Housing situation in NZ continues to show growth, business confidence is high and agricultural prices are relatively soft. GDP growth eased but the expectation is that this will increase medium term. CPI inflation in December was lower than expected at 1.6%. So while there may be external influences to push the rates up internally there are pressures to keep them low.
In the short term it is possible that home loan interest rates may rise. Uncertain markets mean that the cost of funds may increase meaning that interest rates will increase. In the medium to long term it is almost definite that Interest rates WILL rise – the question is when and by how much? The average interest rates since the 1980s when the OCR was introduced has been around 8% and there are pressures on the Reserve bank to return to these “normal” levels.
It’s possible that interest rates may stay the same. This is the indication from the Reserve bank at least short term.
It’s unlikely that interest rates will fall other than beyond the odd “special” on offer by lenders as a fall would further reduce the return on investment rates on investment lending.
When considering fixing your home lending each fixed term has benefits and limitations or risks.
Fixed 1 year rates offer the lowest interest rate but only short term security. If rates take their time to increase, fixing for 1 year and then refixing for another year may end up being cheaper than fixing for say 2 years.
Fixed 2 – 3 years rates offer medium security but their interest rates are slightly higher. Often we can see what we’ll be up to in 2 -3 years and may want to review our mortgage lending in that time frame anyway.
Fixed 4 – 5 years are currently the highest interest rate and offer the least amount of flexibility but the maximum amount of security. Their mid – high 5% interest rates are still markedly lower than the average interest rate of 8%.
You could consider mixing and matching different fixed terms. Have some of the lending on short term fixed and some on medium or long term fixed. That way you have some security plus some flexibility and the opportunity to take advantage of favourable market conditions or limit the impact of the effect of unfavourable markets.
There are so many variations of loan structures that it’s important to know what would most suit your particular requirements both now and in the future. Our recommendation as always is to seek advice before committing to any structure of lending.
