OPINION: At the start of every year for the last 10 years I've made a prediction about interest rates. I’ve been fairly wrong for three years running now. Much like the bank economists, I have proposed that we are nearing the bottom of the interest rate cycle and can expect to see a slight increase in rates. Most of this was because we were already pushing on historic lows and there just didn’t seem to be much call for even lower interest rates to stoke the housing market. Then 2020 came along.
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Obviously, 2020 was a particularly difficult year to predict. For example, who amongst us predicted that, by June, “pivot” would become the most loathed business term around? I also had to ask my wife at least three times for an alternative to the word “unprecedented”. After several options were offered, I just had to stick with it. No other word seemed to describe the impact of Covid-19.
But we do enter 2021 with an unusual amount of certainty in the mortgage market. We know that Covid isn’t spreading through the community (currently) but housing-FOMO is and, because of this, the market is running hot. I recently attended an open home in Tauranga that had been running for about 5 minutes. On the couch was a couple completing an offer for the property. People are desperate to get into the market, are willing to pay up and forego the due diligence one would normally reserve when purchasing a million dollar asset.
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We also know that the Reserve Bank has many other levers to pull before needing to use interest rates to cool the market. LVR restrictions are tipped to come back in March (but are actually already in place). There is renewed talk of debt-to-income ratios (which I happen to think are an ineffective tool). The banks are still adhering to good responsible lending practices; making sure that clients can afford their mortgages at not just 2.5% but a much higher 6%. In a few years, we may all be very glad they are calculating what we can afford at 6% but it’s extremely unlikely rates will get there in 2021.
Business confidence is the name of the game this year and the Reserve Bank will probably want to make sure money is available for business-owners, particularly those who have been affected by the reduction of overseas travellers. So expect the OCR rates to drop and consequently the interest rates on your mortgage. It would not at all surprise me to see a major bank make a grab for a 1.99% one-year fixed rate just to get the headlines. With rates already as low as 2.29% for one year, this isn’t a stretch of the imagination at all.
And with Covid unlikely to be fully-resolved as we head into 2022, it’s unlikely we’ll see a huge jump in mortgage interest rates for the whole year. The best strategy seems to be, therefore, taking the one-year or two-year rate and paying down your mortgage as quickly as possible.
But I could be wrong... again.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
