“I don’t care about climate change –
and I don’t care about Trump, free speech, alien disclosure, or even World War 3.
The world may be going mad, but unless it impacts my family or my mortgage payments, I just don’t have time for it.’
I can understand this, especially for those doing it tough.
There’s good news though – relief is on the way. Rates are falling.
Granny’s getting a pay cut, and I’m getting lower mortgage rates!
Predicting the direction of the next interest rate move is easy; Predicting by how much and when, is the hard part.
Here’s 3 things I’d be thinking about as a borrower over the next 5 years.
Central bankers becoming more famous, the current recession, and the porpoise.
Central bankers shouldn’t be this famous, but they are, and we should pay attention:
7 times a year, we await the RBNZ’s decision on the OCR (Official Cash Rate) like spectators at a modern-day papal conclave. Instead of spotting smoke signals from their monetary policy meetings, we listen for any changes to the rate that applies for overnight loans between banks. If it didn’t influence mortgage and term deposit rates and if we didn’t have such large mortgages, I’m sure we wouldn’t care. The faster we go (the more we borrow), the bigger the mess if bad calls are made with the OCR. A rate too high can crash an economy. And too low could send property prices (and inflation) to the moon again. Globally, central banking deities are gaining more influence. If you plan on becoming (or already are) a borrower, watch what these people do.
The current recession:
The odd thing with ‘bad news’ like recessions, earthquakes, and pandemics, is that it’s actually quite nice news for you as a borrower (so long as you don’t lose your income!). Lowering the cost of borrowing during the hard times results in more money being spent elsewhere, and this is how a central bank can revive a struggling economy.
The cycle to watch is a simple one then: Bad times = lower mortgage rates / Lower mortgage rates = inflation / Inflation = higher interest rates / Higher interest rates = bad times/recession. A good mortgage structure would involve fixing for short periods of time during the bad times, and long periods of time before inflation becomes a problem again.
Beware of the porpoise:
‘Porpoising’ is when a power boat starts to bounce up and down on the surface, much like how porpoises or dolphins leap out of and back into the water. The RBNZ, partly because they use historical data, sometimes don’t act fast enough. In 2020, they kept the OCR too low for too long, and in the first half of 2024, they maintained it too high for too long. A porpoising boat requires either a fundamental redesign of the hull or a slowing down of the craft. Housing booms and recessions are the symptoms of the RBNZ piloting a financial system in need of a re-design, with a rear-view focus using out of date information.
So in light of these three things, how long should you fix for?
It’s depressing studying all the bad things occurring in the world, but if you want to predict the future, it’s helpful to accurately see the present. Failing that, just watch what central banks are doing, and study the reasons why they do what they do.
If you believe the recession is worse than what’s being reported as an example, staying on a floating interest rate or fixing for a period of 6 months would be an understandable strategy. At the end of 6 months, scan for more ‘bad events’ that could justify further drops to the OCR. Always keep a lazy eye on inflation, and consider fixing for longer periods of time when it starts re-emerge.
Starting a family, going down to one income, and moving overseas are all reasons you may want to sell, so don’t fix for a period that outlasts your home ownership plans. ‘Break fees’ apply when you’re breaking a fixed-term mortgage early. If mortgage rates drop further, these fees can be massive. Remember, fixing your mortgage should be about risk-management, not speculation. The only thing worse than being married to a higher interest rate than everyone else, is being stuck with a mortgage you can’t afford. If in doubt, reach out to mortgage adviser for advice around your current situation.
