Mortgage rates are probably as low as they are going to get, economists say.
Rates have hit record lows over the past year as central banks pumped stimulus into their economies to ward off the financial impact of Covid-19.
But ASBs economists said the improving economy, and rising long-term interest rate around the world, would put pressure on New Zealand rates to rise, particularly for home loans fixed over longer terms.
While the Reserve Bank was likely to want mortgage rates and other borrowing costs to stay low over the year ahead, there was less need for more stimulus via a lower official cash rate, they said.
They said, if the economy continued to recover in the way that had been since in recent months it was likely the Reserve Bank would want to begin the process of lifting interest rates next year.
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We dont think OCR increases are on the cards for 2021, but it is possible they could occur later in 2022. At times last year when the economic outlook was particularly dire, it looked like interest rates could fall further, and remain low for many years. Now, because the economy is tracking better than feared, we think the risk is interest rates start moving higher much sooner than we thought six months ago.
Gareth Kiernan, chief forecaster at Infometrics, said, provided economic activity maintained its relatively solid bounceback, it would be fair to say the Reserve Bank had probably stimulated the economy more than enough.
There are concerns about inflation reappearing, and the lift in bond rates around the world could start to put upward pressure on longer-term mortgage rates. The vaccine roll-out is boosting optimism about the global economic outlook, so the rationale for any further interest rate cuts looks thin.
Westpac chief economist Dominick Stephens said he expected mortgage rates, particularly over longer terms, to start rising within the next couple of months. Short terms might increase next year.
But he said the official cash rate might not rise until 2024. There was a short-term spike in inflation, he said, and the Reserve Bank would look through that to focus on medium-term inflation.
But its moves to wind back its large-scale asset purchase and funding for lending programmes would be enough to push rates higher, as would the requirement that banks hold more capital against their loans.
Home loan strategies
ASB economists said the cost of fixing for quite long terms was very low compared to rates of previous years.
Borrowers are prudent to plan to deal with higher interest rate costs over the long run, rather than budget on rates remaining this low indefinitely. And for those who want interest rate certainty now, the cost of fixing for longer terms, at below 3 per cent, is very low compared to the past.
All fixed rates were lower than floating rates, but one-year rates were the cheapest. Choosing short-term fixes and then rolling them over was likely to be the cheapest strategy, they said.
Home loan borrowers can lock in some low rates at present.
But they said the best solution would depend on borrowers own requirements and circumstances.
At the other end of the curve, four- to five-year rates are around 1.5 per cent below floating rates, and around 3 per cent. Borrowers can currently obtain some certainty and a significantly lower rate by fixing their mortgages.
While the future is inherently uncertain, our forecasts for mortgage rates suggest fixing at the current low short-term fixed rates, then subsequently rolling fixed terms is likely to be the cheapest option over a five-year time horizon.
Its always the case that mortgage rates could dip lower, due to anything from RBNZ actions through to renewed threats to the economic outlook. But there is a significant cost of floating at around 2 per cent above what you can fix at now in order to pick the bottom in rates. And there are also risks that rates could move higher sooner than we expect.