It’s the time of the year when the Mortgage Lab buffs up our Crystal Ball, gazes into the infinitely complicated world of economics, and comes up with sufficiently generic interest rate forecasts/predictions to wow and amaze the crowd. But first…
After the turbulence of Covid-19 all but wrote off forecasts for 2020, we didn’t even bother guessing what was going to happen in 2021. But, touch wood, everything has gone smoothly so far and our economy seems to be a steady ship.
Here’s what has happened in 2021 for mortgage interest rates. (information as of 14th July 2021).
It will come as no surprise to anyone who has watched, read, or listened to a news article in the past few months that housing is up in a big way. The national median is up by 28.7% to $820,000 with areas like Taranaki up 41.5% and Marlborough up a whopping 56%. Auckland remains the most expensive area with a median house price of $1,150,000. (REINZ June 2021 Statistics, released 13th July 2021).
The Reserve Bank and the government have implemented a range of changes in late 2020 and early 2021. These include reinstating the Loan to Value Ratios, particularly for investors, completely overhauling the tax deductibility of interest paid on mortgages, and raising the subject of Debt to Income Ratios.
All these changes point to a lack of desire to increase interest rates - a raise from 2.19% to 3.19% is an increase in interest cost of almost 50%; difficult for those who may already be struggling to pay their mortgage.
At a very simple level, in the property market, interest rates are about controlling the lending flow. If money is a little too easy to borrow (often causing inflation), the Reserve Bank may raise the Official Cash Rate (OCR). If money isn't flowing enough, then the Reserve Bank may lower the OCR. This usually causes the banks offered home loan interest rates to rise and lower in line with the OCR.
So where will mortgage interest rates be in 1-2 years? With historically low interest rates now (I know, I know, I said that in 2019 and 2018!), the risk seems to be to the upside. In other words, it seems more likely that the interest rates will move towards 4% rather than 1%. The important question is, will it be back up to 7%, 8%, or even (as per 2007) 10%? And if it does, can you afford your mortgage at 8%? (Look for our #AimFor8 campaign to see several ways to plan on paying your mortgage at 8% in the near future!)
Having said that, the Reserve Bank continues to pull the various policy levers (LVR, DTI, etc) and therefore I still don't see 8% being a reality in the next 5 years. They have plenty of options to cool a housing market if they need, without raising interest rates significantly.
We predict that the most common 1 year discounted fixed rate will be 2.5% by December 2021. At the time of writing, the discounted rates are between 2.19% and, as mentioned above, 2.5% so this would represent a small lift but not a major shift. Will we see a 1.99% on the 1-year rate in 2021 before going up again? Economists are predicting the OCR will start to rise in late 2021 or early 2022 which will likely mean home loan rates going up at the same time. Sub-2% interest rates are not out of the question - the banks are starting to use their Funding For Lending Government Programme - but we can't see them being there for long!
The Reserve Bank has reinstated LVR restrictions meaning borrowing over 80% is more difficult (but, importantly, not impossible). With properties having risen so much in the past year, a lot of first home buyers will be falling into this borrowing level.
Some reprieve came for the lower quartile of first home buyers when the government adjusted the maximum levels for the First Home Grant and First Home Loan. The tests that a bank must put an applicant through are still onerous however; mortgage applicants must be able to afford their mortgage at a rate of ~6.5% - and there is less room for "grey area" decisions. We predict that the Reserve Bank will hold off on further bonuses for first home buyers.
As always, here's a scorecard for next year.
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