Is it Time to Lock in a Longer-Term Home Loan Rate?

ANZ economists are suggesting that it might be time to consider locking in a longer-term home loan rate, as retail rates have dropped further than the official cash rate (OCR) might fall, and global rates are pushing upwards.

Falling Interest Rates, But for How Long?

In their latest property market update, ANZ economists noted that interest rates continued to fall through October, led by a drop in floating rates that followed the OCR down by 50 basis points. While six-month and one-year rates saw significant decreases, two- to five-year rates remained relatively stable.

Most homeowners currently refixing their loans are opting for six-month terms. However, six-month rates are currently between 6.39% and 6.5% at major banks, compared to 5.79% to 5.99% for one year.

The Case for Longer-Term Fixes

ANZ economists believe that paying a slightly higher rate now to secure a cheaper, longer-term rate in the future could be beneficial in the current environment. They caution, however, that we are approaching a point where mortgage rates are likely to stabilize.

“We think it’s again worth considering this month. But caution is needed; we are inching closer to the point where mortgage rates are likely to find a base. Markets are already pricing in OCR cuts all the way down to 3%, which is below our forecast, so timing will be key for anyone who wants to pick the proverbial bottom,” they said.

Global Rates and the Future of Mortgage Rates

Global interest rates are rising, suggesting that wholesale rates are likely to bottom out soon. This means that longer-term rates could even rise if global long-term interest rates continue to climb.

ASB, for example, offered a one-year rate of 5.59% last week but couldn’t go lower than 5.79% this week. ASB considers various factors when setting rates, including market conditions, wholesale rates, and rates offered to savers and term depositors.

Expert Insights

Infometrics chief executive Brad Olsen agrees with ANZ that significant falls in the OCR have already been factored into retail rates. He emphasizes that the relationship between the OCR and retail rates is not always straightforward.

“It would be much easier to communicate if retail rates dropped in lockstep with the OCR, but they don’t. There’s not necessarily a full passthrough. Some rates might be front-loaded, some might be back-loaded. It’s not that the OCR goes down and interest rates definitely go down by the same amount at the same time,” he explained.

Olsen also points out that competitive pressures among banks can influence the rates offered. He suggests that with sluggish housing activity, banks may be more competitive to attract and retain customers.

Finding the Right Path Forward

Olsen believes that a conversation is needed about where interest rates are headed. He notes that pre-pandemic, people often fixed for short periods, assuming rates would continue to fall. However, the current environment requires more caution.

“I’m not saying that’s not going to work, but there’s a need for more caution around where the outlook is, especially given how much retail rates seem to have moved ahead of the OCR. It might be that the Reserve Bank thinks we needed to take the foot off the brake a bit, and we have — but maybe we don’t have to do a huge amount more. It’s not quite as assured that things are definitely going to return to people’s expectation of what a lower interest rate should be,” he said.

Olsen concludes that finding the “new Goldilocks zone” for interest rates will likely be different from the pre-pandemic era.

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