Since my last Fixed vs. Floating blog in June, the NZ Reserve Bank (as widely predicted) increased the OCR, by 0.5% to 2.5%, on the 13th of July.

This was followed in short order by pretty much all the banks, increasing their mortgage floating rates by around the same amount.

As of time of writing, this July, fixed rates haven’t moved.  You may recall last month I suggested that fixed rates, while somewhat determined by movements in the OCR, are perhaps more impacted by wholesale money markets .  This is particularly true of longer-term interest rates.  

The good news is that (at time of writing 28/7/22,) wholesale rates have stabilised over the last month. So, if my analysis is correct, then longer-term Home Loan rates should follow, for now.  Of course, I am not an economist (I don’t think passing Economics 101 at university quite counts..) and these rates can and will change.  

A further observation from the last month is the increasing push back against the Reserve Bank for their slowness in increasing rates.  Some commentators are suggesting that they shouldn’t stick to their script of increasing the OCR to around 4% by late 2023, because the impact of the increases to date are now starting to “bite” and recession is on its way - so the banks have pretty much done their job.

My two cents is this - If the Reserve Bank thinks inflation is “under control” if it has peaked and is on its way down, then they may well button back on the OCR increases.  But it seems to me, they will do what they believe they need to do to sort out inflation, regardless of the collateral damage.  

All eyes on the inflation figures!

So, what can you do if you are re-fixing this month:

Like most Kiwis, if you have a mortgage that needs to be re-fixed, expect it to hurt.  Your budget may need to adjust, which ironically will reduce the spending in the economy which may help to dampen inflation (as well as bring on recession)

So..  hmmm. Do you keep spending to help the economy or stop spending to reduce inflation, to help the economy??  Tricky!!

Fix for one year?

I have clients wanting to fix for 1 year.  I get it, it is the cheapest rate - at the moment.  However, this could be “kicking the can down the road” a little. My concern is that rates may well be peaking this time next year, so things could be a bit grimmer in a years’ time.

Fix for 5 years?

I then have clients who want to fix for 5 years.  I get it.  they have seen rates go from 2% to 6% in a year, and just couldn’t deal with that ongoing increase, so are fixing long term for extra certainly.  Fixing for 5 years will give you that certainty, but most current models think rates will have peaked in the next 1-2 years, so consider that there is a long time after that to be paying a higher rate.

Fix for 2-3 years?

So, we are left with the middle space, fixing for 2-3 years. Or we are left with the conclusion that we just don’t know what is happening, so splitting your loan in to “traunches” or different “bits” is a pretty good hedging strategy right now.

Focus on your debt reduction strategy too.

Regardless of however you fix, I think we should also talk about debt reduction.  Do talk to us about different floating rate options for your Home Loans.  Think Offset loans, revolving credit accounts, redraw facilities.  These can be really useful tools for short term management of debt and achieving long term goals.

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Brendon.

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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.

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.

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