Long-term mortgages becoming more attractive

Fixing long-term home loans could be a more attractive strategy for borrowers as the Reserve Bank plans sharp rate hikes, according to a new report.

Tuesday, August 10th 2021, 1:15PM

ASB’s latest home loan rate report points out that while fixing short-term loans has been a good strategy in recent years, “this approach is now undermined by the prospect of a swift lift in the OCR and mortgage rates”.

“Our expectation that the RBNZ will lift the OCR several times in succession influences our mortgage forecasts and our thoughts regarding the various strategies for borrowers,” the team said.

With the Reserve Bank expected to lift the official cash rate at the next three meetings, economists at the big four bank suggest a longer-term approach could prove more prudent.

“Fixing for some of the longer terms provides interest rate certainty for the next few years at a slightly higher cost than the cheapest rates,” economist Chris Tennent-Brown said. “For those who want this longer-term interest rate certainty now, the cost of fixing for two to five years is still very low compared to the past twenty years.”

How high will rates get?

As economists believe we have passed the trough of the current market cycle, ASB’s team provided a forecast for how high rates will go in their latest Home Loan Rate Report. 

“Based on the ASB economics team’s expectation that the OCR will peak 1.25% higher than current levels (at 1.5%), and our assumptions about bank funding costs and inflation forecasts, we expect mortgage interest rates will lift to levels around 1-2% higher than they are now over the next few years. However, as is often the case, the outlook is far from certain.

“Borrowers will be pleased to know we still expect mortgage interest rates to eventually settle over the next decade at levels well below the long-run averages of the past 20 years. And borrowers can lock in incredibly low longer-term interest rates (between 2.95%-3.99% at the time of writing) if interest rate certainty over a longer period is of the utmost importance.”


Continue reading this article at the original source from GoodReturns.co.nz



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