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 mortgagerates for borrowers are little changed from last month. The attractiveness ofthe 2 year rate – which sits back where it was in December – makes it hard tolook past for borrowers who can access it.   

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

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

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

The question many borrowers will be asking is: why notfix for longer if the RBNZ is about to lift ratesagain? This is a good question – and the short answer is, it’s already toolate. Indeed, the very fact that the market now fully expects the RBNZ tolift the OCR again explains why the mortgage curve is so steep (i.e. longerfixes cost much more). The trick is to get in before the market arrives at thatview, but that is always tricky. 

We have had a preference for fixed over floating for about ayear now, but beyond the specials, it is now very much a line call at currentlevels. Of course, fixing brings certainty, and fixing is as much about riskmanagement as it is about winning every time, so a selection of terms makessense. 

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


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