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Kris Pedersen

Interest Rate Commentary - February 2022


The next few months could see a shock to some Kiwi households’ budgets, as around 60% of existing mortgages are having their fixed rates expire within 12 months. 


Interest rate increases

This time last year, a large number of borrowers were fixing on the 12-month rate because this had proven to be the way to go over a cycle where interest rates had been trending downwards. Borrowers coming off these historically low interest rates will now find an environment where inflation has already pushed rates significantly higher than where they had been. The likelihood that interest rates will trend even higher means that borrowers will probably want to fix for a longer term. 

If borrowers take the option to fix now for, say, a 3-year term, the interest rate is already roughly double what they would have been fixing the 12-month rate at a year ago. And this is before the upcoming Official Cash Rate review on 23 February. The financial markets are expecting the year to end with a cash rate of 2.25%, which is significantly up on the current 0.75% setting, and again likely to incentivise many borrowers to opt for more certainty in choosing the mid to longer-term rate options. 


Possible effects of inflation and Covid

There is a contrarian view to this, in that households will struggle with higher interest rates, especially at a time where the prices of goods and services are also rising at a rapid rate. If this results in too much dampening of consumer expenditure, it may put pressure back on the Reserve Bank not to raise the cash rate as high as is being expected at the moment. 

Covid will also continue to play a large part in this. How Omicron and any potential future variants are handled will ultimately be a big factor in determining if the supply chain issues keep inflation high or instead are transitory. 


CCCFA

One point which is worth keeping a close eye on is how the inquiry into the CCCFA (Credit Contract and Consumer Finance Act) is handled. Changes to this Act were rushed through at the back end of 2021, and the news is already full of reports of ‘unintended consequences’.

The changes were introduced to protect vulnerable borrowers, but instead are being applied across the finance market. In particular, this is causing massive issues for those seeking mortgages, as many applicants who were previously approved are finding that they are now being declined. 

Loan conversion rates have already plummeted, and if this is not remedied, there is a risk of negative flow-on effects to the economy as SME businesses find it harder to access capital. If this continues to restrict lending, the Reserve Bank may find it difficult to persist with their hiking of the cash rate. 


What should you do?

It is currently our view at Kris Pedersen Mortgages that with inflation hitting a three-decade high in the December quarter, most clients who have no short-term intention of selling down should consider the longer-term fixed rates. With the inflation rate rise of 5.9% being roughly double the top end of the Reserve Bank’s 1-3% target range, at this stage the likelihood of where interest rates will go is firmly on the side of continual increases.


If you would like to discuss your borrowing options with Kris Pedersen Mortgages, fill out the form here and they will be in touch. 


Kris Pedersen
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Kris Pedersen
Kris Pedersen Mortgages
© Gilligan Rowe & Associates LP

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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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