Which interest rates carry the highest risk?

by Ksenia Stepanova05 Sep 2018

Borrowers need to consider their appetite for risk when purchasing property and selecting their interest rates as they could rise faster than expected, ASB economists have warned.

In its latest home loan report, ASB says both floating and fixed mortgage rates should remain around their current levels well into 2019, however says that there is some risk of them rising quicker than forecasts assume. Borrowers should therefore think about their financial circumstances, and whether they would be able to shoulder higher interest payments if short-term rates rise unexpectedly.

“At the moment, the outlook is quite steady,” ASB economist Kim Mundy told NZ Adviser. “We expect the Reserve Bank to leave the OCR on hold until early 2020, so as a result of that you’d expect little volatility to flow through into interest rates. However, it always depends on each individual’s appetite for risk.”

“There are always pros and cons for each type of mortgage structure,” Mundy explained. “If you want flexibility then some of the shorter-term rates can be better, but if you prefer certainty then the longer 5-6 year rates are better able to offer you that. If we look at our forecasts, they suggest that rolling shorter rates could potentially provide lower interest rate costs as long as the current outlook doesn’t change.”

Mundy says that selecting the best mortgage deal is far from straightforward, given the myriad of domestic and global factors that might impact interest rates. While the lowest carded rate may appear cheaper, it also can change quickly, so personal preferences around certainty must be considered as opposed to simply opting for the lowest rate.

The floating rate is currently around 30pbs below its 10-year average, and is a good choice for borrowers who need repayment flexibility. However, short-term fixed rates are currently considerably cheaper and provide a degree of certainty for the immediate term.

1, 2 and 5-year rates remain relatively low, but are more susceptible to sharp increases.

“Just remember that the only certainty about the future is uncertainty,” Mundy says in the report. “The ‘best’ mortgage rate is only known in hindsight. But, with the above pros and cons for the various mortgage rates on offer, we hope to give a good platform from which to consider interest rate options.”

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