Economist says rates may rise sooner than anticipated
Mortgage rates may have reached the limit of how low they can go, and ASB senior economist Chris Tennent-Brown is predicting that they may be “around the low point,” with rates as low as 1.99% being offered by banks.
The cheap mortgage prices are the result of the Reserve Bank’s hard response to COVID-19, but Tennent-Brown acknowledged that we could still see rates dip a little lower in response to influences on bank funding costs.
Tennent-Brown encouraged borrowers to factor in that interest rate costs will rise over the long term, and is warning them not to budget for interest rates staying as low as they are indefinitely.
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“Mortgage interest rates have dropped to the lowest level on record going back to the 1960s in wake of the Reserve Bank’s actions,” Tennent-Brown commented.
“We still expect the RBNZ will want mortgage rates and other borrowing costs to remain low over the year ahead - however, we think the improving economy has reduced the need for it to provide any more stimulus via a lower OCR, or other measures.”
“If things continue to go well, the next question people will start to ask is when the RBNZ will start to unwind the huge amount of stimulus it has put in place,” he added.
“And to cut to the chase, borrowers will be asking - when will mortgage rates rise?”
Tennent-Brown says that if we see the economy continue to recover as well as it has over the past year, then the Reserve Bank may look at increasing interest rates in 2022 - earlier than previously expected. However, he says borrowers will likely still be able to secure low rates over the next few years, even if they aren’t quite at the sub-3% mark.
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“We think it is prudent for borrowers carrying debt for longer than the next couple of years to budget on rates being higher than they are now,” Tennent-Brown said.
“However, with all this talk about higher interest rates in a few years’ time, borrowers will be pleased to know we still expect rates to eventually settle over the next decade at levels well below the long-run averages of the past 20 years.
“Borrowers can lock in incredibly low long-term interest rates of around 3% now, if interest rate certainty over a longer period of time is important.”
