Mortgage rates: Should you float or fix and for how long? The experts’ views

The jury is out on the best strategy for mortgage holders, as the Reserve Bank of New Zealand (RBNZ) looks to keep the Official Cash Rate (OCR) elevated for longer than previously planned.

Would borrowers be fine paying more to float or fix their mortgages at shorter durations in the hope interest rates fall by quite a bit in a year or two years’ time?

Or is the risk that inflation lingers such that they’d be better off paying lower rates to fix their mortgages for longer durations?

Experts the Herald spoke to held differing personal views (which should not be interpreted as personal financial advice).

Independent economist Tony Alexander believed borrowers should anticipate a gradual fall in interest rates soon. Meanwhile, ANZ strategist David Croy thought they’d fare best hedging their bets by fixing at a range of durations.

The thing the pair had in common was that their views weren’t swayed by the RBNZ’s Monetary Policy Statement, released last week.

The situation as it stands

The RBNZ kept the OCR at 5.5 per cent, but indicated there was a small chance it could rise.

The central bank suggested it wouldn’t cut the OCR until early 2025. In May, it believed inflation was abating to the extent it would be able to start lowering the rate in late 2024.

The market interpreted the Monetary Policy Statement as “mildly hawkish”, according to Croy, who noted it sent the two-year swap rate up 10 basis points.

While the shift wasn’t huge in the bigger scheme of things, it might come as unwelcome news to the scores of borrowers betting on interest rates falling soon.

RBNZ data to June shows that from February, one-year fixed was the most popular type of mortgage taken out by both owner-occupiers and investors. This was followed by floating in the month of June.

Nonetheless, from May, the less common (but cheaper) three-year fixed mortgage jumped in popularity.

So, what should borrowers do now?

‘It’s difficult to beat the market’

Croy believed borrowers would be wise to spread their risk, given the amount of economic uncertainty around the world.

He said the slight upward revision in the RBNZ’s OCR track should be seen as a “wake-up call for anyone who thinks there’s absolutely no way mortgage rates can go higher”.

Croy noted mortgage rates were also affected by wholesale interest rates, which have been rising.

He said there was scope for mortgage rates to rise or stay higher for longer.

“It could be a long wait,” he cautioned borrowers hanging out for reprieve in the near-term.

Croy was also unconvinced slowing growth in China would hamper the New Zealand economy to the extent the RBNZ would cut interest rates sooner, or by more then currently envisaged.

“If interest rates stop going up because things start to go wrong overseas, that’s often countered by a tightening-up of credit,” he explained.

“Corporates and banks tend to have to pay more to borrow in wholesale markets. That has an offsetting impact. You may see swap rates go down, but bank funding margins widen. That’s what we saw in 2008 [in the Global Financial Crisis].”

Croy said borrowers shouldn’t rely on “bad news to save the day”.

“It’s just difficult to beat the market all the time,” he concluded, suggesting mortgage holders give themselves options.

Don’t underestimate the impact of NZ’s primary sector taking a hit

Alexander, who conducts several economic and property-related surveys, had a different view.

He said if borrowers believed the RBNZ’s forecasts, there would be an incentive to fix for two or three years.

However, he believed fixing for a year or two was the way to go, as interest rates would start to come down sooner than expected.

Why? Alexander worried about the impact a sluggish Chinese economy would have on New Zealand export prices. Last week, Fonterra cut its milk price forecast for the second time this month due to weak Global Dairy Trade auction prices.

“It’s a deterioration in our biggest trading partner that shouldn’t be ignored.”

Alexander believed people underestimated how weakness in New Zealand’s primary sector would affect inflation and therefore interest rates.

“I don’t think anyone should expect interest rates to fall precipitously,” Alexander said.

“It’s going to be a long time before the Reserve Bank says things are all good.”

However, Alexander didn’t believe the central bank tried to scare people into thinking interest rates might go higher with its latest Monetary Policy Statement.

He saw the housing market recovering, with prices possibly rising by 10 per cent in 2024, despite interest rates remaining relatively high.

Alexander said houses are cheaper, job security is good (even though unemployment is rising), construction is falling, migration is booming, credit rules have eased and listings are down.

A change of government could also see consumer lending rules, and tax rules that affect investors, eased.

Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the Parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.