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Interest rates on home loans are likely to fall further and remain below their current levels for the next two to three years, ASB economists say.
In an update, they said they expected the official cash rate to drop to -0.5 percent early next year, bringing fixed-term mortgage interest rates below 2 percent.
Currently, the major banks offer two-year interest rates of 2.69% and three-year rates of 2.79%.
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Rates would not return to their current levels for a couple more years before slowly starting to climb in the more distant future, ASB said.
The bank’s economists said that meant a strategy of a series of revolving terms would likely deliver the cheapest interest rates to borrowers.
“The lowest rates offered vary between the major banks, but are generally in the ‘belly’ of the curve, from one to two years. These low rates are almost 2 percent below floating rates, at or near record lows, and are available at rates around 2.6 percent.
“At the other end of the curve, three- to five-year rates are 1.49 percent or more below floating rates, and now below 3 percent. Currently, borrowers can get some certainty and a significantly lower rate by fixing their mortgages.
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The one and two year rates are generally the cheapest on offer.
“While the future is inherently uncertain, our forecasts for mortgage rates suggest that short fixed terms and then successive ones are likely to be the cheapest option over a five-year time horizon … mortgage interest rates may still fall. more, but there is a float cost in order to collect the bottom line in fees. Choose a strategy that suits your own flexibility needs and minimizes the cost of the interest rate. “
Mortgage adviser Bruce Patten said that was the strategy adopted by most of his clients. Most had been fixing it for a year, although some had opted for the more expensive six-month option.
ASB said there would be a number of factors that would eventually raise interest rates, including the Reserve Bank’s plans to require banks to hold more capital against their loans. That has been delayed due to the impact of Covid-19.
“We hope that the Reserve Bank wants to gradually introduce higher capital requirements for banks in the future, and that would lead to increases in the costs of bank loans and mortgages. An earlier than expected introduction of these changes could push mortgages higher sooner than our current forecasts imply.
“In summary, we continue to believe that it is prudent for borrowers who are in debt for more than the next few years to budget for higher mortgage rates than they are now.
“However, with all this talk about higher interest rates in a few years, borrowers will be pleased to learn that we still expect mortgage interest rates to eventually stabilize over the next decade at levels well below the averages at long term of the last 20 years. . And borrowers can lock in incredibly low long-term interest rates of around 3 percent now if interest rate certainty over a longer period is of the utmost importance. “
