Long term interest rates are falling.
…and short-term interest rates are now more expensive.
This foreshadows a recession or at least downward pressure on mortgage rates in the short-medium term.
The last time this happened was back in April 2007 when the 1-year rate was 8.80% and the 5-year rate was 8.55%. This preceded the upcoming economic crash by 12-18 months!
At the time, mortgage rates continued climbing until they peaked in April/May 2008. What followed then was a sharp decline in mortgage rates until they bottomed at 5.50% in May 2009.
December quarter CPI was below expectations at 7.20%. The Reserve bank expected a 7.50% result so there is a possibility the OCR trajectory may soften and we may see only a 0.25% or 0.50% hike. Bank economists have already lowered their peak OCR expectation. This will still impact the short term rates slightly, but the 3-5 year rates may fall a bit more in due course. Fortunately, data in the US looks promising that things are getting under control so there is light at the end of the tunnel!
So, what does this all mean?
Firstly, there is no guarantee mortgage rates will follow the exact same trajectory, but they may resemble it loosely.
Split your interest rate renewals where possible – We may not know when rates will peak but based on the information available there is a high chance it’ll peak within this year.
Avoid the extremes of the 6m and 5-year rates. There is a possibility the rates are even higher in 6m time for the short-term rates, and based on an inversion now high likelihood rates do start to drop in the medium to long term making the 5 years not worth it.
My personal view is the 12m rate is also risky – especially if we draw parallels to April 2007 (8.80%) vs. April 2008 (9.80%) vs. April 2009 (5.60%).
Other banks haven’t moved yet – but will do so inevitably. ASB’s move is reflective of the market so it isn’t a surprise. If your loans are up for renewal within 60 or so days, now is a good time to lock something in. If you’re an existing client, we have reminders in place 60 days before your loan renewal. But if you want to discuss earlier, have a chat with your Twine adviser.
The good news is, that since the long-term rates have peaked that gives some certainty over the medium term as to what the rates will be and gives some confidence around planning. The 5-year rates have essentially remained unchanged since June 2022.
Crystal Ball Gazing?
Right now, the 36 – 60 month rates are reflective of the market, with the 12 – 24 month rates still having more room to increase in the short term. I wouldn’t be surprised to see those rates rise another 0.25% before they peak – crystal balls are notoriously cloudy though!
In our office, most clients are fixing between 2-3 years, but I wouldn’t be surprised if the 3-year starts becoming less popular right now.
If your loans are coming up for renewal and you’re not sure which rates to lock in, now is the time to have a chat with one of our Twine advisers. Forward this email to anyone who has a loan as we’d love to help them navigate this climate.
2023 will be interesting, do you know someone who we can help?
We’d love to help them review their mortgage, so that they can make the most out of their finances and tackle 2023 with their best foot forward. Feel free to forward them this email and click the button below to schedule a call back with one of our Twine advisers.
