When to fix your interest rates long term?
With the Reserve Bank of New Zealand (RBNZ) making significant moves recently, it’s worth considering at which point, is it the right time to lock in longer-term fixed rates. Let’s break down the current situation and what it might mean for you.
Recent Developments
On October 9th, the RBNZ delivered a 0.50% reduction to the Official Cash Rate (OCR), bringing it down to 4.75%. This was double the reduction forecasted back in August. The move was largely driven by the need to provide relief to an economy struggling with weak data, including low GDP growth and rising unemployment.
Why the big move?
The RBNZ’s decision seems to acknowledge that previous monetary tightening may have gone too far. The Federal Reserve’s recent 0.50%rate cut in the US also made it easier for the RBNZ to proceed without significantly impacting the NZ dollar or import costs.
So, what’s the outlook on mortgage rates?
Since this announcement, one-year fixed mortgage rates have dropped to below 6% with more rate cuts likely, we could see another 0.50% reduction at the final OCR announcement of the year on November 27th, potentially bringing the OCR to 4.25% by Christmas.
If these cuts continue, one-year swap rates could drop closer to around 3%, translating to one-year fixed mortgage rates between 5 - 5.50%. Longer-term rates might also become more competitive, with three-year fixed rates possibly falling below 5.00% early next year.
So, what are the pros and cons of fixing rates long term now?
Pros:
Stability: Fixed rates provide certainty in your financial planning, protecting you from future rate hikes.
Budgeting: Easier to manage cash flow with predictable payments.
Cons:
Opportunity Cost: If rates continue to fall, you might miss out on lower rates.
Flexibility: Fixed rates can limit your ability to refinance or adjust your loan terms if you lock something in and your plans change.
Our view on fixing longer term
As rates trend down, it’s important to have realistic expectations. The extremely low rates seen during the COVID-19 era were unusual and are unlikely to return soon. The RBNZ considers a ‘neutral’ OCR to be around 3%, so rates around 5% or lower are still a good deal in the current market.
Probably at some point in the next 12 -18 months there might be a time when the longer-term rates start to look appealing.
The economic outlook is still a bit murky
Despite recent rate cuts, the economy remains fragile. Sectors like construction, retail, and tourism are weak, and rising unemployment is still causing uncertainty. While rate cuts will help, we expect that the economic recovery might not be fully realised until later next year or even early 2026.
This is having a direct impact on the housing market
The housing market as we see it is still bumpy and there is still a high number of listings. Core Logic recently published that house prices came down another 0.5% in September, but we are hearing of and have seen ourselves that auction rooms are getting busy again and clearance rates are picking up. However, even with the expected rate cuts, a major recovery in house prices seems unlikely in the near term. Activity may pick up as interest rates and house prices stabilise, but a significant rebound will take a bit more time in our opinion.
As always, we recommend tailored advice around what you should do, we’re here to help.