Predicting what home loan interest rates will look like in the future isn’t easy, but since when has that ever stopped us? As we move through 2023, we’re starting to look ahead to 2024. What will happen to the interest rates on our home loans in New Zealand? Let’s break it down.
The Reserve Bank of New Zealand (RBNZ) plays a big role (but not the entire role) in setting the cost of home loans by controlling a rate called the Official Cash Rate (OCR). After the global pandemic, the RBNZ has brought – some would say rather violently – the OCR back up, which will make loans more expensive. In May 2020, the OCR was at 0.25%. At the time of writing the rate is at 5.5%, not yet at the heady levels of 2008 when it was 8.25%, but still a large jump from it’s lows, just 3 years ago.
Exact predictions are tough, but most experts think that the interest rates on home loans are not far from their highest point for this cycle. Here’s why:
After-Pandemic Recovery: As the world and New Zealand recover from the pandemic, the cost of loans tends to rise. The RBNZ raises the OCR to slow down economic growth and keep the prices of goods from rising too fast (inflation).
Price Increases: The RBNZ wants to stop prices from rising too quickly. If prices keep going up, the RBNZ will probably raise the OCR in 2024, making loans more expensive but if inflation is seen to be coming under control, the Reserve Bank will do all it can to stop raising the rate.
The World’s Influence: What happens in other countries can affect our home loan interest rates too. If big economies like the USA and China recover well, and they raise their own rates, our rates might go up as well. Most countries have the appearance of starting to get inflation under control.
While most people think home loan costs have peaked, there are some things that could alter this:
Surprises in the Global Economy: If something unexpected happens to the world economy, the RBNZ might decide to continue raising rates. An example may be where the New Zealand dollar becomes relatively strong or weak compared to another currency such that a change in the OCR is needed to adjust it. If the currency becomes more important than inflation, this will lead the decision to alter the rate.
Slow Growth at Home: If our own economy doesn’t slow – ie; if inflation doesn’t get under control – the Reserve Bank will probably look to continue increasing the OCR until inflation is within their preferred range.
No one can predict home loan costs with 100% certainty, and it’s always important to have an in-depth discussion with your mortgage adviser about your specific circumstances before committing to a rate, but we can make educated guesses.
Right now, it looks like the interest rates on home loans in New Zealand might be near their peak but when you’re fixing your mortgage, the question is when do you think the rates will drop down significantly (for example, when will they drop by more than 1%). The spread between the one-year fixed rate and the five-year fixed rate is incredibly tight at the moment with the longer 5 year rate being just 0.3% to 0.5% lower than the 1-year.
Based on that, if your view was that interest rates were going to drop within the next year or two, you would look to take a shorter term (ie; fix for 1-2 years) so your mortgage rates will roll off at a lower rate. If your view was that interest rates will remain high or (heaven forbid) go even higher, you may look at the longer term rates (3-5 years) to lock in these rates and give you some protection.
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