'Horse has bolted' on interest rate bargains

Econ Talks - inflation spikes to 4.9 per cent in September quarter.

The “horse has bolted” and the opportunity to dodge future interest rate increases by fixing your mortgage has passed, ANZ chief economist Sharon Zollner says.

Fixed mortgage interest rates have risen by between 20 and 28 basis points over the past month, depending on the term, her bank’s analysis says.

Reserve Bank data shows the average one-year standard rate offered to new borrowers was 3.82 per cent in October, up from 3.74 per cent in June.

Zollner said the increases were part of a series that had happened in the wake of a sharp lift in wholesale interest rates, driven by expectations of looming official cash rate (OCR) rises.

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“This anticipation effect does mean that fixed mortgage rates are unlikely to move up as quickly as the OCR in future, but they are likely to continue edging higher. Fixing now may lessen the impact in the short term, but with longer-term fixed rates now significantly higher already, there’s no ‘quick fix’ available.

“The choices now look to be either pay more now to fix for longer, which brings with it more certainty, or pay less now and fix for a shorter time, but acknowledge that it is likely to cost more later.”

The bank’s analysis showed that for a two-year rate to now be a cheaper option than two one-year fixed terms, back to back, the one-year rate would have to rise from 2.79 per cent to 3.58 per cent over the next 12 months.

Sharon Zollner says there’s no longer a fixed-rate option that will definitely save you money.
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Sharon Zollner says there’s no longer a fixed-rate option that will definitely save you money.

“While our forecasts have the OCR rising by more than that over the next year – we expect it to rise by 1.25 percentage points – the one-year mortgage rate has already risen by 0.60 percentage points since June. We don’t expect upcoming OCR hikes to be derailed by Delta again, but there is a small risk that they are.

“A lot still needs to go right for the Reserve Bank to be able to deliver on the amount of hikes priced into markets, and when the fix-for-shorter-or-longer question is this finely balanced, and mortgage rates already higher, that biases us mildly in favour of shorter. But there isn’t much in it, and some people may place a higher value on certainty.”

She said it would come down to individual circumstances and what was important to people.

“Now purely from a cost perspective there’s no one rate that is obviously a better bet than the others. It probably comes down to how much as an individual borrower you value certainty and how much you value flexibility, how close to your pain threshold your repayments are, whether you’re expecting lump sums of money to arrive – all those sorts of things are different for every person.”

She said a few months ago it was clear there was inflation pressure building and the market had not fully priced that in, creating an opportunity for borrowers.

“We thought the Reserve Bank would leap into action – it happened faster than we thought. But now the market has fully priced it in and actually relative to our [OCR] forecast, has overpriced. It’s a much more nuanced situation.”