Homeowner finances will be squeezed this year, with almost half of all fixed-term mortgages coming up for renewal in the next 12 months.
The jump in rates could see some unlucky mortgage-holders forking out nearly $1000 extra a fortnight.
In a new report, Westpac’s acting chief economist Michael Gordon warns Kiwis of the impending bad news.
“Conditions for borrowers will become a lot tougher over the coming year. Close to half of all fixed-term mortgages will come up for repricing over the next 12 months,” he says.
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“Borrowers who fixed for two years in early-2021 may have secured a rate in the 2.5% to 3% range. Those same borrowers are now looking at a two-year rate that’s more than 3 percentage points above what it was back then.”
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Gordon says large increases in interest rates “will take a big bite out of many households' disposable incomes”.
A homeowner who bought an average-priced house in 2021 with an 80% mortgage fixed for two years could face a $530 jump in their fortnightly repayments.
“If you live in Auckland, where house prices tend to be higher, that increase in interest costs will be around $900 per fortnight.”
With many commentators signalling a peak in fixed term rates, and banks quietly offering cut-price deals on their fixed rates, OneRoof asked mortgage experts for their tips on re-fixing.
Lisa Meredith, from Loan Market
“Most clients are fixing between one to two years as there is an expectation that rates will be lower in a year’s time,” Meredith tells OneRoof.
“But it really is case by case, and largely dependent on the client’s risk profile and personal circumstances. If clients were going down to one income – if they were having a baby for example – then they would want some certainty for the future. If clients were looking to sell in the next 12 months, then that too would determine how to structure lending.
“For those that don't like taking risks, such as fixing for shorter terms with expectation that rates will drop soon, then they may be better to choose a longer one- to three-year term.
Westpac acting chief economist Michael Gordon: “Conditions for borrowers will become a lot tougher over the coming year.” Photo / Supplied
“For mortgage-holders who get annual bonuses or are expecting an inheritance, then it would be prudent to either leave some of their loan floating or fix a portion in at a shorter term, such as six months.
“Those who have large mortgages, over $400,000, I would be having the discussion about splitting fixed rate terms, which effectively hedges your bets. It means you don't have to worry about a large loan coming off a lower rate onto a much higher one all at once, or having to wait years to take advantage of lower rates when rates do start to drop.”
Aseem Agarwal, from Global Finance
“Our view is that interest rates will peak around 7% by mid this year and will remain the same until the election,” Agarwal tells OneRoof.
“Later in the year or early next year, I’d expect the official cash rate and mortgage interest rates to start falling, with the one-year rate dropping to around 6% in the first half of next year and 5.5% in the second half. In 2025, it will fall back to around 5%.
“I’d recommend customers fix at somewhere between one year to 18 months, given they would want to take advantage of falling interest rates next year. The long-term two- and three-year rates have already fallen below the one-year rate, which indicates rates will remain high only in the short-term.”
Sue Mihakis Tierney, from Sue Tierney Mortgages
“Most clients are focusing on one- or two-year fixes. Three-year fixes will take you back into another election year and a lot of clients are trying to avoid that,” Tierney tells OneRoof.
“Clients who choose one-year are doing so because they think that things will improve. Some are doing a mix of one- and two-year fixes.
“I would advise households to review their expenses every year and see what they can reduce. People can’t afford to be wasting money in this market. In the good times they may let Sky TV or the gym slide, even though they’re not using them.”
Bruce Patten, from Loan Market
“Assuming you can service at slightly higher rates than we have now, my advice would be to fix for 12 months, as I expect [the Reserve Bank] will overshoot the mark and have to bring rates back down.
“If however you are struggling and higher rates might impact you adversely, then a slightly more conservative approach in splitting your lending between one and three years gives you some fall back if banks increase rates beyond what’s currently expected.
“My view is that even though the Reserve Bank says we will hit 5.5% in the OCR, they will likely hold at 5% after 0.25 percentage point increase in April. Obviously, a lot depends on how the Government goes about paying for the cyclone recovery.”
