In the past month, we saw the relentless increase in interest rates as they continue their march skyward. The rise in rates has been a little brutal and there isn’t a lot of places to hide for mortgage holders. Let's take a quick look behind the numbers to increase our knowledge as to the what’s and why’s of Home Loan rates.

The numbers in July '22:

This month we saw interest rates increase again. A few more reflections on that below:

A Fixed 1-year rate is now around 5.35%

A Fixed 2 year rate around 5.7% (newsflash.. at time of publishing (6th July, 22) the 2 year fixed rates have dropped by around 0.3% at most banks)

A Fixed 3 year rate at around 6%

What to do:

My advice hasn’t really changed from the last few months. Although there really is nowhere to hide from higher interest rates, the 2–3-year rate is probably a bit of a “sweet spot” for many, offering some certainty, without paying too much of a premium for this.

However, and as always, what to do with your interest rates is specific to your situation. We talked these through in more detail in our blogs over the last couple of months.

‍

Read more tips about fixing vs floating below:

https://www.velocityfinancial.co.nz/post/fixed-vs-floating-june-2022

https://www.velocityfinancial.co.nz/post/fixed-vs-floating-for-may-2022

https://www.velocityfinancial.co.nz/post/fixed-or-floating-factor-in-your-lifestyle

‍

How to predict the future (or make an informed guess at the least)

If you want to be predicting what interest rates will be doing in the next year or so, here is what I would be doing:

1) Listen to the Reserve Bank's forecasts of the Official Cash Rate (OCR) movements.

Of course, this will change over time, but the floating interest rates banks offer are closely aligned to the OCR. The OCR is currently at 2%, and the RBNZ is currently forecasting this will peak at 4% in late 2023. Therefore we could safely guess that floating rates will rise a bit more.

Interestingly, the floating Home Loan rate is generally equal to, the OCR + a bank margin. This equation made the news this week, as the margin banks are using has increased from around 2% 10 years ago, to around 4% today. It may be worth keeping an eye on this, as banks again recorded very healthy profits for the last quarter.

I wonder if perhaps there is some space for this bank margin to decrease a little? Just a question?!

2) Watch what the wholesale interest rates are doing

You can find these online here https://www.rbnz.govt.nz/statistics/series/exchange-and-interest-rates/wholesale-interest-rates

Wholesale interest rates are the rates that banks secure money at (and you can see the “margin” for these fixed rates is around 2%. The rates tend to have factored in what the market thinks is going to happen, so in lots of ways these have already priced in what the OCR is expected to do in the upcoming months.)

In the middle of the month of June, the USA increased their OCR by 0.75%. This led to the wholesale interest rates in New Zealand spiking. In the week that followed, NZ banks raised their interest rates by up to 0.5% across the board. As soon as those wholesale rates increased, this one wasn’t too hard to pick.

The good news for this week, at time of writing, wholesale rates are nudging back down, meaning the immediate pressure is off any further increases..

‍

As always, if your fixed rate is rolling off, have a chat to us. There may be some options that you are unaware of that could save you a chunk of cash.

‍

Brendon

‍

About Brendon:

Hi, I'm Brendon, one of the owners and advisers at Velocity Financial. I have been giving advice on mortgages and insurances at Velocity for around 15 years, and it is great to be able to work with people to achieve their financial goals. Prior to giving money advice I worked as a youth worker and managed teams for a not for profit organisation. I live with my wife and one of my sons (the other one only stays when he needs food) in Berhampore, and if I'm not talking revolving credit accounts I can be found running the trails of Wellington.

‍

Brendon Ojala (FSP119244) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Brendon’s disclosure statement on our website.

‍

‍

‍