With interest rates at record lows, we explore some different factors that could affect the interest rate on your mortgage this year.
15 February 2017
The Official Cash Rate (OCR) in New Zealand has been dropping steadily since July 2014, and currently sits at a record low of 1.75 per cent.
However, with a new government in power in the US promising to increase fiscal spending, there is a chance 2017 might be the year this easing cycle comes to an end.
Here are three important factors that may play a big role in deciding what will happen with your interest rate this year.
1. The USA
If Donald Trump follows through on his promise to fiscally stimulate the US economy, then that will likely have flow on effects for the rest of the world. A stronger US economy is good news for global economies, so our own economy here in New Zealand could grow. This will likely increase inflation and possibly interest rates with it.
At the same time, the element of uncertainty around how the Trump government will perform and if his gamble will pay off, means credit conditions may tighten, making it harder for banks to borrow money which again might lead to an increase in rates.
One of the RBNZ’s main targets in observing monetary policy is to ensure that price stability (or inflation) remains between 1 – 3 per cent.
The OCR is a key tool used to achieve this stability. When inflation is low, the Reserve Bank will decrease the OCR. Any savings for the banks can be passed on to mortgage holders to leave extra money in their back pockets. When inflation is too high, it will increase rates to reduce spending.
Current inflation levels in New Zealand are relatively low at 1.3 per cent. While this is inside the 1-3 per cent target, at times it dropped well below 1 per cent in 2016. If Trump delivers, we should see inflation increase to a higher level, however, if for some reason it dips below 1 per cent again, the RBNZ will find it difficult to make any decision on increasing rates.
3. The housing market
While there are a number of factors suggesting that rates will go up this year, the housing market, and our current debt-to-income ratios will also be carefully considered before any major rate decisions are made.
It’s no secret that slowing house price growth in New Zealand has been on the RBNZ’s agenda for some time. The recently introduced higher Loan to Value Ratio’s (LVR) for investors and owner-occupiers will go some way to slowing things down, however, an increase in inflation, and with it interest rates, will also help.
The latest data places the debt-to-income ratio in some parts of the country at 10:1, meaning many home owners have high debt. Any move to increase interest rates will need to be carefully considered to ensure it doesn’t put too much stress on borrowers’ back pockets.
Is now the time to fix or float?
If there’s a chance of interest rate movements this year, then perhaps now is the time to look at fixing your interest rate? A fixed interest rate loan allows you to lock in an agreed interest rate with your lender.
This way you don't have to worry about the rising and falling interest rates of your loan over time. There’s more information on fixing your home loan here, however the best thing to do is to give your Mike Pero Mortgage Broker a call and talk through your options.