Record low interest rates won’t come back: ASB

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Borrowers should expect mortgage rates to remain above recent lows, ASB chief economist Nick Tuffley said.

People with home loans should plan for higher mortgage rates in the years to come, says ASB chief economist Nick Tuffley.

But while home loan rates would not return to their recent record lows, they would remain below the long-term average borrowers have experienced over the past two decades, he said in the ASB report on home loans for May.

Mortgage rates peaked during the global financial crisis (GFC), with adjustable rate loan rates rising above 10%, data from Reserve Bank Te Pūtea Matua shows, but ASB did not expect term loans to reach these levels.

Tuffley expected the Reserve Bank’s official cash rate (OCR) to peak at 3.5%, but said: “We expect most fixed-rate mortgage rates to rise to level off in a year range of 5.5% to 6.5%.”

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ANZ and Kiwibank both announced rate hikes on home loans earlier this week, and Tuffley said home loan rates would continue to rise for the rest of the year.

Kiwibank chief economist Jarrod Kerr said in his First View report released Monday that about half of mortgageholders are switching to new interest rates nearly double what they were previously paying.

“It’s going to hurt,” Kerr said, with the pain for households coming from both their higher home loan repayments and generalized inflation, which is driving up the cost of things like groceries.

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Adrian Orr said interest rates were returning to normal after being low during the Covid pandemic.

The market now expects OCR to fall from its peak reached in late 2024, Kerr said.

However, there were risks that expectations for the economy turned out to be wrong, which could affect home loan interest rates.

“If economic conditions deteriorate, the Reserve Bank has the option to keep current settings longer or even lower borrowing costs to support the economy,” Tuffley said.

With so much uncertainty, choosing a mortgage strategy to minimize interest costs was easier said than done, Tuffley said.

For individual households, it’s not just about the tariff, he said. Factors such as flexibility and security were important to some borrowers.

“It is often not so easy to choose the cheapest tariff. Historically, the mortgage curve has been “tick-shaped,” with short-term fixed rates lower than both floating and longer-term rates,” Tuffley said.

With one- and two-year home loan rates lower than adjustable rates, borrowers could get some security and a lower interest rate simply by fixing their mortgages for terms of up to two years, rather than having an adjustable-rate mortgage , he said.

Independent economist Tony Alexander said few people followed his suggestion a year ago to fix their five-year home loan at 2.9%, with most opting for slightly cheaper shorter-term rates.

After missing that opportunity, he said the optimal strategy is to opt for shorter-term one- and two-year interest rates and “take the pain” and wait for the interest rate cycle to change and for rates to fall again start.

“If I were to fix now, I’d probably take a mix of a year or two and go down the curve,” said Alexander.

Alexander predicted pain for the retail and travel sectors as households on home loans would cut spending, but he said only a small number of borrowers would find their interest rates rising higher than the “test rates” used by banks to calculate whether they could afford repayments.

People who needed security to pay back could opt for longer-term loans, Tuffley said.

However, there was a risk that home loan rates could peak and fall sooner than expected.

“It’s always the case that mortgage rates could fall due to Reserve Bank actions to renewed threats to the economic outlook,” he said.

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