Five-year home loan rates have peaked, but don’t be tempted
Experts recommend borrowers fix for one year, and many people don’t know they can split their mortgage across multiple periods, writes Rob Stock.
Mortgage rates are nearing, or past their peaks, says Kiwibank chief economist Jarrod Kerr.
Interest rates charged on new four- and five-year fixed term home loans look to have already peaked, and are beginning to come down, Kerr says.
While there might be some small further increases in oneyear and two-year fixed home loan rates, they are also close to peaking.
But variable rate home loans have further to go, and will track up with two increases in the official cash rate (OCR) expected from the Reserve Bank Te Pu¯ tea Matua in February and April.
ASB and Westpac have already started to cut their longterm home loan rates, and their five-year home loan rates are now lower than their one-year rates.
This is what is known as an ‘‘inverted yield curve’’, says John Bolton, chief executive of Squirrel Mortgages, and it happens when markets see the peak of interest rates coming.
‘‘When that curve is inverted, people who are a bit more desperate, will tend to go to the lowest rate, which is out at the end of the curve,’’ he says.
Banks offer variable rate home loans, on which interest rates can change at any time, and they offer fixed-rate home loans typically for one to five years, with interest rates that do not change during the period of the loan.
Many households with mortgages are coming to the end of fixed rate periods, and face having to refix at higher rates, but Bolton urges people to be cautious about plumping for longer-term fixed rate loans.
Bolton fears a repeat of what happened the last time the yield curve was inverted.
‘‘Everyone rushes out to the five-year because it’s a little bit cheaper, and there’s a little bit more money in their back pocket, and then the curve collapses, and suddenly the short-term rates are lower, and suddenly these guys face all these break fees,’’ he says.
Break fees are fees banks charge to compensate them for the loss of income on a home loan contract cancelled by a borrower.
Someone who locked in a $500,000 debt for five years, who broke it after one year after rates had fallen 1%, would face a break fee of about $5000 for every year left on their contract, Bolton says.
‘‘It’s something people haven’t seen for years. The last time we saw serious break fees
was back in 2008 and 2009,’’ he says.
If he were refixing a loan for himself now, Bolton says he would refix for a year, and ‘‘take the pain’’ of higher repayments, waiting for loan rates to fall.
But, ‘‘trying to predict interest rates is an imperfect science’’.
Kerr says with early signs that inflation is beginning to come down, Kiwibank economists now think the Reserve Bank won’t have to lift the OCR as far as people previously through.
The OCR is currently at 4.25%, and looks set to rise to 4.75% in February, and then perhaps to 5% in April. Previously, economists were tipping it to go to 5.5%.
‘‘If we’re right, the Reserve Bank will stop hiking in April, so regardless of quantum, the finish is likely to be April,’’ Kerr says.
Kiwibank expects the Reserve Bank to start cutting the OCR again in November, after which interest on variable rate loans will start to fall.
‘‘The three to five-year rates look like they have peaked,’’ Kerr says.
‘‘That one-year will be dragged higher, but not huge amounts.’’
Kerr says if he were fixing a home loan for himself now: ‘‘I probably would only fix for one year, because I think rates would come down.’’
However, he says: ‘‘Last year, when rates started to rise, I put it all on to the long end, mostly, three to five years.’’
That means chunks start rolling off in 2024, and through 2025.
Many people, including people who might be expected to know, don’t realise they can split their mortgage across multiple periods, Kerr says.
‘‘They just lump it all onto a two-year rate, or whatever it is. It’s like you’ve gone all-in at the casino when it comes to rates strategy.’’
Splitting a home loan across several fixed-rate terms spreads borrowers’ interest rate risk.
People struggling to make repayments should seek help, Kerr says.
Banks will do everything they can to help people with things like budgeting assistance, consolidating debt, and in some cases, even going interest-only on their loans, or deferring some portion of their repayments.
‘‘I had to do that in 2013 when I was unemployed for a while. I just deferred everything for six months,’’ Kerr says.
‘‘The bank was really good about it.’’
Bolton says: ‘‘If I was just really genuinely struggling, I would talk to my bank, talk to my adviser, and get a one-year interest-only loan, and that should be enough to get through to the other side of this.’’