Economists say one-year rate cheapest way to fix mortgage

Thursday, 13 June 2019

What does the official cash rate mean?

Homeowners wanting to save money or get ahead on their mortgages could do well to take a one-year rate and think about fixing for longer in 2020, economists say.

Interest rates are still at historic lows and it has been predicted the official cash rate could still be cut up to twice more.

At the moment, one- and two-year rates are available below 3.9 per cent for people with at least 20 per cent equity. The average market two-year rate is 4.8 per cent.

Economics consultancy Infometrics is predicting by June 2020 the average two-year rate will still only be 4.8 per cent, but then rise to 5.11 per cent a year later and 5.4 per cent in 2022.

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Chief forecaster Gareth Kiernan said that indicated one-year rates were the best value.

'People will be able to refix next year before interest rates start pushing significantly higher. That being said, there doesn't look to be much between fixing for one, two, or three years. Even though they're historically low, four and five-year rates look like they're considerably higher than the average cost of fixing towards the short end.'

Five-year terms are still around 5 per cent so rates would have to rise a lot within the next five years to make fixing for a long time a better deal.

It's hard to know what lies ahead, but economists expect borrowers to still be able to get low rates this time next year.

Nick Tuffley, chief economist at ASB, agreed short-term rates looked appealing.

'Rolling one-year fixed rates might prove to be the cheapest option if the Reserve Bank does indeed cut further and drag down term rates a little more.

'But depending on the specials that are available, two- and three-year terms can give much of the benefits of any future cash rate cut regardless of whether the Reserve Bank even cuts, as a further rate cut is already priced into term rates. ASB's two-year special is slightly lower than the one-year rate and a bird-in-the-hand option.'

Cameron Bagrie, of Bagrie economics, said he did not expect to see the full extent of further OCR cuts flow through to retail rates.

Banks would probably try to improve their margins on lending, he said.

There was only so far rates for savers and term deposits could fall, he said, before people stopped putting their money in the banks, which would affect the flow of money the banks had to lend.

'We are at the point where we can't take savings rates down too much lower.'

Kiernan said he expected deposit rates to rise in time. He predicts 10-year bond rates to hit 3.12 per cent by June 2023.

'A key point to note is that there is very little difference in deposit rates along the curve from about six-month terms onwards at the moment. So although a saver might be concerned about shorter-term rates falling further in the near term if the Reserve Bank cuts again, there seems to be little other incentive to invest for anything longer than about a year if you think that longer-term wholesale rates are going to rise again over the medium term.'