Mortgage borrowers brace themselves
Mortgage borrowers will have to brace themselves for the "brutal reality" of higher interest rates, but there's a silver lining in the recovery of the economy, economists say.
This morning the Reserve Bank kept the official cash rate on hold at its historic low of 2.5 per cent, as was widely expected
Governor Graeme Wheeler said the New Zealand economy was estimated to have grown by more than 3 per cent in the year to September.
He said OCR rises would probably be required next year, although the extent and timing depended largely on whether the heated housing market and construction sector spilled over into broader inflation pressures.
ANZ chief economist Cameron Bagrie expected the first hike to come either in March or June.
"The brutal reality here is that you've got an underlying economy that's improving quite nicely," he said.
"With that economic hum is going to be the inevitability that interest rates are going to move up a little bit over time."
Modest changes in interest rates can make a big difference to loan repayments - for example a $400,000 mortgage at 8 per cent would cost $8000 more each year than a 6 per cent loan.
Bagrie said one of the reasons interest rates were moving was that "more people are getting jobs and we're getting better pay increases".
"You can have the flipside, where you have the unemployment rate moving up and no pay increases, and interest rates down at lows," he said.
"Which would you want?"
Bagrie said people had jumped into shorter-term fixed mortgages recently, with few opting for the longer terms up to five years.
"You're losing a lot on the trade upfront if you lock into a five-year rate today, compared to what you'd get on say, a six-month rate," he said.
"So people have tended to take the low rate in the interim."
ASB senior economist Jane Turner said fixed rates had already priced in the latest announcement, while floating rates would not move until the OCR did.
"The market has largely fully priced in our expectations for the tightening cycle," she said.
"There is the potential that longer-term rates could lift higher still, depending on developments offshore."
Turner said ASB was picking the OCR to reach 4 per cent in two year's time.
- © Fairfax NZ News
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