If you have a mortgage, you probably know this all too well: after years of lower-than-ever interest rates, since late 2021 interest rates are rising again, as the Reserve Bank of NZ (RBNZ) tries to curb the highest inflation pressure in 30 years.

While higher rates are good for savers, it’s not so good for mortgage holders. Here’s a summary of what’s happening in the lending space.

Why is the Reserve Bank increasing rates?

As you may have noticed, cost of living is rising significantly due to high inflation. According to Stats NZ’s latest quarterly report, at 6.9 per cent, annual inflation is at its highest since the 1990s – way higher than the RBNZ’s target range of 1 to 3 per cent.

To try and bring it down to a comfortable level and manage economic stability, the Reserve Bank mostly has one tool – and that’s increasing the official cash rate (OCR). In short, and without going into too many technical details, the OCR is our central bank’s interest rate, which determines how much it costs banks to borrow money from the RBNZ. This, in turn, influences interest and mortgage rates offered to retail consumers.

So, why is the RBNZ increasing rates right now? Conditions have changes dramatically in the past couple of years. Interest rates have been going down since mid-2016. In 2020, the RBNZ decided to cut it down to 0.25% – in line with other countries’ central banks – to support the economy through the pandemic. As a result, mortgage rates also dropped to their lowest-ever level.

But the impact of Covid-19 on the economy turned out to be more limited than anticipated. And while the aggressive monetary stimulus accelerated growth, coupled with supply chain disruption, it also led to rising inflation.

We’re now in an environment where inflation risks eroding the value of people’s savings and their spending power, while also undermining consumer and investment confidence. So, the RBNZ is pushing up rates again, to encourage a more sustainable economic growth – that is, a rate of growth that can be maintained without creating other significant economic issues.

How high will the OCR go?

No one really knows at this stage: it will depend on how quickly economic conditions get to a comfortable level. And the past couple of years have shown with great clarity that predictions often miss the mark.

Having said that, based on the current data, the RBNZ expects the OCR to peak at 4 per cent at the end of 2023, and stay around that level for the following two years. Some economists are more restrained and predict that the OCR will peak at 3.25-3.5%.

What it means for mortgage holders

Once again, there’s no crystal ball here: no one knows how high the OCR – and therefore, mortgage rates – will go in the next few months, let alone years. But if your fixed-term mortgage rate is due to expire soon, you may be pondering over your next move.

Floating or re-fixing, and if so, for how long?

It’s not a simple question to answer, as it entirely depends on your needs and goals. Here are some key things to think about, to get you started:

• How much are you comfortable paying? If short-term affordability is important to you, shorter term fixed rates may be lower than the floating rate.
• Are you looking for certainty of budgeting? Then re-fixing your mortgage may be the right option for you at this stage.
• Would you like to sell your house shortly or plan to make a significant extra repayment? With a fixed-term mortgage rate, you may incur a break fee if you repay the loan in full ahead of time (for example, with the sale proceeds) or make extra repayments over a certain limit. On the other hand, a floating rate would give you the flexibility to pay as much as you like, whenever you like.

These are just some thought-provoking questions: depending on your circumstances, there may be other factors to consider. Everyone is different.

Like to discuss this further?

Get in touch. A lot is changing at the moment, and talking with an expert can bring some clarity to your mind. Our SHARE financial advisers are here to answer your queries and help you find a mortgage structure that’s suitable for your needs and goals: click here to find an adviser near you.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.