Historically low interest rates are not coming back: SBA

Borrowers should expect mortgage rates to stay above recent lows, said SBA chief economist Nick Tuffley.


Borrowers should expect mortgage rates to stay above recent lows, said SBA chief economist Nick Tuffley.

People with home loans would be cautious to budget for higher mortgage rates over the next few years, said ASB chief economist Nick Tuffley.

But while home loan rates would not return to recent record lows, they would remain below the long-term average that borrowers have seen over the past two decades, he said in the loan report. ASB real estate for May.

Mortgage rates peaked during the global financial crisis (GFC) with variable rate lending rates exceeding 10%, according to data from Reserve Bank Te Pūtea Matua, but ASB did not expect home loans to fixed term reach this level.

Tuffley expected the Reserve Bank’s official cash rate (OCR) to peak at 3.5%, but he said: “We expect most fixed-term mortgage interest rates to rise to around 3.5%. establish in a range of 5.5% to 6.5% over the coming year.”

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ANZ and Kiwibank have already announced home loan rate hikes this week, and Tuffley said home loan rates will continue to rise for the rest of the year.

Kiwibank chief economist Jarrod Kerr said in his First View report released on Monday that about half of mortgage holders were charging new interest rates nearly double what they had paid.

“It’s going to hurt,” Kerr said, with households’ pain coming both from their higher home loan repayments, but also from general inflation that’s driving up the cost of things like groceries.


Adrian Orr said interest rates were returning to normal after being low during the Covid pandemic.

The market now expects the OCR to start falling from the peak it reached at the end of 2024, Kerr said.

But there were risks that expectations about the economy could turn out to be wrong, which could impact mortgage rates.

“If the economic situation worsens, the Reserve Bank has the option of maintaining current parameters for longer, or even reducing borrowing costs to support the economy,” Tuffley said.

With so much uncertainty, choosing a mortgage strategy to minimize interest costs was easier said than done, Tuffley said.

For individual households, it wasn’t just the rate that mattered, he said. Factors such as flexibility and certainty were important to some borrowers.

“It’s often not as simple as going for the lowest fare. Historically, the mortgage curve has been “tick-shaped,” with short-term fixed rates lower than variable and longer-term rates,” Tuffley said.

With one- and two-year fixed mortgage rates lower than floating rates, borrowers could get some certainty and a lower rate simply by fixing their mortgages for terms up to two years, rather than having an adjustable rate mortgage, he said.

Independent economist Tony Alexander said few followed his suggestion a year ago to peg their five-year home loan at 2.9%, with most opting for slightly cheaper short-term rates.

Having missed this opportunity, he said the optimal strategy was to go for short-term one- and two-year rates, and “take the pain”, waiting for the interest rate cycle to change and the rates begin to fall again.

“If I was fixing now, I’d probably take a mix or one and two, and go down the curve,” Alexander said.

Alexander predicted hardship for the retail and travel sector as households with home loans cut spending, but he said only a small number of borrowers would see their rates rise above “rates of test” used by banks to calculate whether they could afford the repayments.

People who needed repayment certainty could choose longer-term loans, Tuffley said.

But there was a risk that mortgage rates might end up peaking and falling sooner than expected.

“It’s still the case that mortgage rates could fall, due to anything from Reserve Bank actions to renewed threats to the economic outlook,” he said.

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