Uncertain times for mortgage holders

SHARP CORRECTION: Standard & Poor's says there is a significant risk of a property crash in New Zealand.
SHARP CORRECTION: Standard & Poor's says there is a significant risk of a property crash in New Zealand.

The official cash rate remains at its record low, but floating mortgage-holders should keep an eye on longer-term rates creeping up behind the scenes.

Reserve Bank governor Graeme Wheeler held the OCR at 2.5 per cent this morning, as was widely expected.

The OCR is closely tied to a range of interest rates for borrowers and savers alike, including the floating mortgage rate.

But banks base a lot of their longer-term pricing for fixed mortgages on 'swap rates', which don't receive the fanfare that accompany OCR movements.

While still sitting at historically low levels, swap rates have been steadily trending upwards over the past two months.

BNZ chief economist Tony Alexander said the world was changing, as money started to move out of fixed interest (like government bonds) and into stocks.

"As that happens, those medium to long-term interest rates go up," he said.

Homeowners may risk missing the boat if they don't fix before rates rise, but the point at which that will happen remains uncertain.

Alexander suggested fixing half the mortgage and keeping the other half floating as a potential hedging strategy.

He said there was a very small chance - about 1-2 per cent - that the Reserve Bank could cut the cash rate further, which would likely drag down floating mortgage rates.

However, with the "mother of all construction booms" about to kick off and the Auckland housing market going strong that was highly unlikely.

The universal consensus amongst analysts is that interest rates will begin to move up, not down, at some point in the near future.

But economists have consistently had to push their predictions for the next rate rise further and further out.

The latest Reuters consensus poll of 17 economists has four picking an OCR rise in June, five guessing it will happen around the end of the year and eight supporting a hike in early 2014.

Alexander was frank about taking the forecasts - including his own - with a grain of salt.

"The reason I'm not saying get stuck in, jump into fixed, is because over the past four years none of us have called these interest rates correctly."

He reiterated that there was no guarantee that the global economy would begin to take off any time soon.

"These remain exceedingly uncertain times."