Floating rates tipped to jump

JAMES WEIR
Last updated 05:00 13/12/2013

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Homeowners are in for a mortgage repayment hike in the new year, the Reserve Bank says.

Reserve Bank governor Graeme Wheeler said yesterday that the official cash rate would have to have to start rising next year, possibly as early as March, to contain inflation.

The rate has stood at 2.5 per cent since March 2011, but could rise as high as 4.75 per cent, he said.

On a $300,000 mortgage at current interest rates, borrowers pay $808 a fortnight. If rates were to go up by 2.25 percentage points, that would rise $1016 a fortnight.

Average floating mortgage rates offered by banks have hovered around 5.7 per cent for the past year.

Borrowers can expect floating rates to jump to about 8 per cent in a couple of years, taking a big bite out of household budgets. If the economy grows even faster than the Reserve Bank expects, rates could head close to 9 per cent, some economists say.

Mortgage brokers suggest switching to a fixed-rate mortgage now, before the increases begin.

Craig Pope, whose firm acts as brokers in Wellington, the Hutt Valley, Kapiti Coast, Palmerston North and Levin, said he was already advising people to switch.

"Rates had to go up eventually . . . it depends on circumstances, but most clients are starting to fix."

"I don't think it will be too sharp. The economy is pretty steady, in my opinion."

House prices have risen more than 18 per cent in the past two years, fuelled by low interest, migration, and a shortage in Canterbury and Auckland.

The Reserve Bank's speed limit on low-deposit loans was expected to subtract 1 to 4 percentage points from annual house-price inflation in the first year. "However, the impact is very uncertain," the bank said.

Wheeler said the economy was estimated to have grown at more than 3 per cent in the year to September.

However, economic growth was expected to start losing steam from early 2015.

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- BusinessDay

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