Home loan rates tipped to rise in 2018

An interest rate hike pause will give homeowners a chance to reassess their mortgage choices....
In New Zealand retail banks had also become much more selective about home loan lending over the past year in response to fears of a property market melt-down. Photo by Craig Baxter.

Home loan rates will likely rise a bit in 2018 but are not expected to take a big jump up, experts believe.

Reserve Bank data shows average fixed-rate mortgages rose by between 11 and 17 basis points between December 2016 and October 2017.

On a $350,000 mortgage fixed for two years over a 25-year term the increase was equivalent to an extra $22 a month.

But it was lower than had been expected.

Jose George, the general manager at Canstar New Zealand, said rates had moved up a bit in the past year but there hadn't been any big changes.

"We have seen the historical lows go. But rates have increased much lower than expected."

George said low inflation meant central banks had held rates low in a bid to stimulate spending and economic growth.

In New Zealand retail banks had also become much more selective about home loan lending over the past year in response to fears of a property market melt-down.

"There has been a lot of pressure on credit quality. Banks have become far more selective in terms of their risk appetite."

George said based on what had happened in the past 12 months it was hard to forecast where interest rates would go in 2018.

Economists are predicting the Reserve Bank won't make any moves to increase the official cash rate until late this year or even next year.

There is some suggestion the next rate change may also be down if inflation remains persistently low.

"It speaks to the uncertainty," he said.

But David Tripe, Massey University's banking expert, said looking at the yield curve suggested interest rates would be higher by the end of 2018.

"If we start to see bubbles of inflation from the new Government that might encourage a rate rise."

Increasing the minimum wage to $20 an hour by 2020 would push up wages at the lower end which was likely to increase inflation, Tripe said.

That could mean short-term rates start to rise as banks price in an increase in the official cash rate which affects floating and short term rates more than longer-term fixed rates.

"It is much more likely rates are going to rise over the next two years than fall."

But he doesn't think they will rise by much because household debt is so high.

That means any increases to rates will bite into people's spending capacity, limiting how much they can buy.

"People will be much more sensitive to interest rate rises than in the past."

Mark Collins, chief executive of Mike Pero Mortgages, said some people coming off very low rates from 2016 would see an increase.

But for others the change may be marginal.

"I think it will be lower for longer."

He urged people to shop around given there was around an 0.8 percentage point difference between the lowest and highest rates in the market.

On a $350,000 loan that could equate to about $200 extra a month. A lower rate could also allow a person to borrow more, he said.

Good advice was key.

"It's not just the rate but how it is structured."

Splitting a mortgage into several different parts could also help spread the risk of being faced with a big jump up all at once.

For those due to re-fix their home loan Collins said people needed to think about whether their circumstances had changed.

He urged people not to take the first offer made by their bank as it might not be the best in the market.

Collins said people should think about where they wanted to be financially in three to five years.

"The faster you pay it off the less interest you will pay."

Rising home loans
Home loan rates Dec 2016 - Oct 2017:
• floating 5.61% - 5.84% up 13 basis points
• one-year fixed 4.94% - 5.05% up 11 basis points
• two-year fixed 5.14% - 5.25% up 11 basis points
• three-year 5.4% 5.57% up 17 basis points
Source: Reserve Bank

Deposit rates
Savers who are looking for a better rate at the bank are likely to be disappointed.

Canstar's Jose George said there was unlikely to be any good news for savers, with term deposit rates expected to remain low.

"There isn't really much good news. In a low inflation environment what can you expect?"

He urged savers to be on the look out for specials which banks sometimes offered to help manage their books when a large amount of deposits matured at once.

The weighted average six-month term deposit rate rose just 2 basis points between December 2016 and November 2017 to 3.32 per cent, Reserve Bank figures show.

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