As a first home buyer or an existing mortgage holder, staying informed about your mortgage repayments, especially the factors that can impact interest rates, is important.
You’ve probably heard various opinions on whether rates have peaked or if there’s a possibility of further increases or from now interest rates will come down. While many claim that interest rates have peaked in New Zealand, at Global Finance we believe they may still there is a scope that interest rates may go up in the later part of 2023.
Aseem Agarwal, our Head of Mortgages, provides some valuable insights on why he thinks this may be the case and the impact this will have on the refixing of mortgages.
Domestic OCR and inflation
When talking about interest rates, most people focus on the domestic OCR (Official Cash Rate) set by the Reserve Bank of New Zealand (RBNZ). The OCR represents the cost at which banks borrow or lend money in wholesale market. Basically, lower OCR rates make loans more affordable, while higher rates make borrowing more expensive. The Reserve Bank utilises the OCR as a tool to control inflation. By increasing the OCR, it hopes to reduce spending and borrowing and thereby curb inflationary pressures.
The OCR currently stands at 5.5%. Based on the assumption that sufficient measures have been taken to tame inflation, this rate is not expected to increase. Inflation in New Zealand was 6.7% for the year ending March 2023. The latest inflation is 6 %. The BNZ’s research team sees the rate of inflation coming down to 4.5% by the end of the year. However, only time will tell.
The Global impact
As well as domestic inflation, inflation rates in overseas countries such as Australia, England, and the USA also have a significant impact on interest rates in New Zealand. “The main reason we feel that interest rates will go higher is that inflation is still running high in overseas countries such as Australia, England, and the US,” Aseem tell us.
The news from these countries indicates that interest rates haven’t yet reached their peak because inflation is still their target range between 1 to 3%. Over the next 4 to 6 months, we might witness rate increases as the reserve banks of Australia, England, and the US gradually try to bring down inflation with their target range.
The crucial point to understand is that when New Zealand banks provide funding, not all of it comes from local sources. Approximately 20 to 30% of funding is obtained from overseas. If the cost of borrowing increases in the overseas markets for New Zealand banks, logically some of this cost will be passed on to consumers in New Zealand through higher retail rates.
Implications for homeowners
Interest rates currently sit around 6.9% to 7%. Aseem predicts, “It is likely that these rates may touch 7 to 7.25% by the end of December or January.” Many in the market are hoping for a turnaround in interest rates in a year’s time; that interest rates will begin dropping.
However, if interest rates continue to rise over the next 4 to 6 months, as we predict, they are likely to reach their peak by December or January and then remain unchanged for the following six months.
In such a scenario, any downward movement in interest rates will likely occur in the latter half of 2024, not earlier as many are touting.
Assessing when to refix your mortgage
As a first-home buyer or a mortgage holder, it’s a very good idea to be mindful of potential interest rate movements, particularly when looking to refix loans.
Aseem believes that any downward movement in interest rates favouring borrowers may be a considerable time away. He explains, “In our experience, the pace at which rates go down is slower than the pace at which they go up. So ideally, to see any reasonable movement in the interest rate in a downward cycle will be at least 15 to 18 months away. When people are thinking about refixing their loan, they need to keep this in mind and perhaps think whether a 12-month, 18-month, or 24-month rate might be a better option. While shorter-term refixing options may seem attractive, it’s important to think beyond the immediate future and we recommend you take this timeline into account. You may position yourself better by opting for a longer-term refixing period, such as 18 or 24-month rates. Since each case is different, therefore, each case deserves personalised advice which is suitable to them and their circumstances.
Trust Global Finance for guidance and support
The complexities of interest rates and mortgage decisions can be more than a little off-putting for many. We get that, and that is why we’re here to provide answers, support, and tailored and personalised guidance.
“The need for a comprehensive understanding and proactive decision-making is vital for first-home buyers and mortgage holders alike.”
Our experienced team, led by Aseem Agarwal, Head of Mortgages, can help you make informed decisions so you can secure the best deal in an ever-changing financial market.
We understand the concerns and considerations of first-home buyers and mortgage holders, and we’ll take the time to understand your situation and offer practical and personalised advice that aligns with your financial goals.” Contact us today to book a no-obligation chat on 09 2555500 or firstname.lastname@example.org
The information and articles published are true to the best of the Global Finance Services Ltd knowledge. Since the information provided in this blog is of general nature and is not intended to be personalized financial advice. We encourage you to seek Financial advice which is personalized depending on your needs, goals, and circumstances before making any financial decision. No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or its employees liable.