Releasing its weekly economic report on Monday, ASB said we would likely be at mortgage rate lows or beyond. As the economic recovery from COVID-19 continues both locally and internationally, the bank expects the pressure to start to build on longer-term mortgage rates.
He predicts OCR will peak at 1.25% at the end of 2023 or early 2024 – a percentage point higher than where it currently stands.
“We have the impression that we have taken a step forward … it’s good that the economy is doing so well that we are starting to think about removing some of these emergency measures in the next two years”, Said ASB Wealth Senior Economist Chris Tivez-Brown said.
Rather than increasing rapidly, the bank expects retail mortgage interest rates to remain low over the coming year. The Reserve Bank’s loan financing program, essentially a cheap reserve fund available for banks to lend, could lower some interest rates slightly.
But as economic improvements gain momentum, the risk is that interest rates will start rising sooner. Noting that the bank’s economic forecast is slightly more optimistic than that of the Reserve Bank, the ASB predicts by 2025 that retail mortgage interest rates could be 1 to 1.5% higher than today, but still low by historical standards.
“We bought our forecast of forward rate hikes [towards] the start of next year rather than the end of next year, as we thought a few months ago, ”added Tivez-Brown.
So what does this mean for borrowers?
Many have their mortgages at long term fixed rates and therefore will not be affected until the end of their current fixed rate term.
New borrowers will need to make sure they can afford the slightly higher interest rate repayments, which bank stress tests take into account.
“If things continue to move in the direction of [ASB’s] RBNZ forecast or forecast, we think mortgages will go from those areas in the low 2s to the 4 to 5 percent range in 2023-2025, ”Tivez-Brown said.
Rather than being a huge fiscal concern, the higher interest rates should only slightly hit the back pocket.
Borrowers worried about higher rates could gain certainty by setting a longer-term rate now. Another option is to split the mortgage, choosing different interest rate terms for part of the loan.
“[Borrowers] you have to think about what is most important: is it certainty, flexibility or a bit of both. “
Kiwibank has also pushed back its forecast for interest rate hikes. Earlier this month, he predicted the first OCR hike in November. On May 26, he forecasted a first hike in May, followed by another in August – a total of three increases to 1 percent next year.
Kiwibank Chief Economist Jarrod Kerr said about 60% of Kiwi’s mortgages are variable rate or are expected to be phased out of fixed rates, and 80% will be reset in the next six to twelve months.
Kerr expects to see “a deep mortgage fixation crisis” as borrowers who want certainty about rising interest rates begin to lock them in.