Brace yourself for rates rise

Prepare to tighten your belts, home-owners - the official cash rate is on the brink of rising for the first time in over three years.

On Thursday, the Reserve Bank is expected to nudge the OCR up 0.25 per cent from its current historically low rate of 2.5 per cent, making New Zealand one of the first OECD central banks to lift cash rates in recent years.

The increase is expected to be just one of a series of hikes that could take the OCR as high as 4 per cent over the next 12 months.

While some will immediately feel the pinch as floating mortgage rates rise, thousands of Kiwis who have cash in term deposits are unlikely to see a similar jump in their interest income.

Financial commentator Bernard Hickey said when the OCR goes up, banks will almost immediately lift their floating mortgage rates by 0.25 per cent as well, "which will be a bit of a shock to lots of people".

Fixed mortgage rates won't change much for now, because banks have been already set their rates in the expectation of OCR rises. Mortgages fixed for one and two years are about 5.7 per cent to 6.5 per cent respectively.

However, Hickey said after five years of low rates, the proportion of people with floating mortgages is relatively high. "This time around, under a third of people are fixed for more than a year."

Matt Nolan from Infometrics said the decision for mortgage- holders on whether to fix or float all came back to the usual issue of how much risk you were willing to take.

He said Infometrics was currently projecting floating rates as high as 8.4 per cent by 2016, though other economists were predicting slightly lower rates.

Nolan said that in theory, higher interest rates should provide a check on house price growth, or even push prices down, but in reality owners were often reluctant to drop prices, so instead the market "stalls".

Hickey said New Zealanders held mortgages totalling around $200bn, but also had about $130bn in term deposits. "Lots of people on term deposits will be asking, 'will my rates go up', and it's actually possible they won't go up much, because the banks are flush, so they're not under pressure to raise term deposits.

"Everyone will see banks putting up the floating rates but not the term deposit [rates], and that automatically means the banks will have widened their profit margins."

Hickey said apart from its impact on everyday mortgage- holders and savers, Thursday's announcement will be "quite an event in the world of rate-watchers and trenchcoat-wearers like me", for its historic significance. "In New Zealand terms, that's the longest we've been with a fixed rate since the birth of the modern Reserve Bank."

The OCR was introduced in 1999 at 4.5 per cent, fell to a low of 2.5 per cent in April 2009, nudged back up to 3 per cent in late 2010, and dropped back to 2.5 per cent in March 2011 following the Christchurch earthquake.

It has stayed there ever since.

Sunday Star Times