Interest Rate Outlook for May

With the exception a higher floating rate and competitive 2 year fixed rates for borrowers with 20 percent equity or more, the carded mortgage rates for borrowers are little changed from last month. The attractiveness of the 2 year rate – which sits back where it was in December – makes it hard to look past for borrowers who can access it.    

Borrowers with 20 percent equity or more will find it hard to look past a 2 year special rate of 5.95 percent. Not only is this rate below both the 18mth and 3yr rates, but it is also below the new carded floating rate.  

Given the upward-sloping wholesale interest rate curve, this represents a significant discount for this tenor. Of course, the 6-month rate remains the cheapest, and is thus attractive. However, whereas a borrower who fixes for 6 months will almost certainly get hit with “rate shock” in 6 months time given the likely rise in the OCR, those who select the slightly more expensive 2yr rate will be afforded greater protection – albeit at a slightly higher upfront cost.  

The proposition for high-LVR borrowers (who may not be able to access the special rates that are about) is less clear, and our preferences are the 6 and 18-month terms. Again, the 6-month rate is below floating, but it too will be exposed to “rate shock”, and the 0.5 percent jump for an extra year’s protection is likely to prove worthwhile should the OCR go higher, as we expect.  

The question many borrowers will be asking is: why not fix for longer if the RBNZ is about to lift rates again? This is a good question – and the short answer is, it’s already too late. Indeed, the very fact that the market now fully expects the RBNZ to lift the OCR again explains why the mortgage curve is so steep (i.e. longer fixes cost much more). The trick is to get in before the market arrives at that view, but that is always tricky.  

We have had a preference for fixed over floating for about a year now, but beyond the specials, it is now very much a line call at current levels. Of course, fixing brings certainty, and fixing is as much about risk management as it is about winning every time, so a selection of terms makes sense.  

Specials do of course skew the results, but the upshot is, the market is “fully priced” for what the Reserve Bank is about to deliver, so the focus now should be on specials, rather than trying to beat the market. The horse has bolted, so to speak.