YOUR MORTGAGE: A couple more rates jumps likely

I thought I would be commenting on home loan rate changes made by the banks, but at the time of writing (yesterday) there has been none - a major surprise. Some could occur overnight.
Following last week's predicted 0.25 per cent increase in the Official Cash Rate (OCR) to 2.75 per cent, I expected an immediate change to the variable rate, and probably also the shorter term fixed rates.
It is probably competitive pressures that are holding banks back from increasing their rates as no one wants to be the first. It could also suggest that lending margins are not under too much pressure and the market had anticipated the OCR rise and factored that into its pricing.
Whilst the Reserve Bank has started the increasing interest rate cycle and is likely to increase the OCR again at successive review dates on July 29 and September 16, it may well follow the Australian example and pause after that - given our recovery is not as robust as Australia and household budgets are still pretty constrained.
Associated with the recovery, inflationary pressures are building. Apart from one-offs such as the GST increase in October, projections are that over the next two years inflation will be towards the top end of the acceptable 1-3 per cent band that represents sustainable growth. But it does seem likely negative offshore developments may at least slow down the increasing interest rate cycle. If that's correct, then there is a case for having a portion of your debt on the variable rate - if that rate is going to be slow coming off its historical lows.
I like a strategy that achieves a spread of risk and provides the opportunity to get some cash-flow benefit if the increasing cycle is slower and/or shorter than expected, but provides protection if it is faster and a bit longer.
Such a strategy could involve a portion of your debt on a variable rate and perhaps a mix of the 18 month and 2-year fixed rates to provide certainty for a reasonable period but without being exposed to a single review date.
How long rates will remain elevated will depend on inflationary pressures and the state of the world economy - or more importantly the economies of our major trading partners.
What is certain is that there is a lot of uncertainty out there, mainly due to the state of offshore markets.
While central banks will try to stimulate their economies by continuing with low official cash rates, the international market's aversion to risk and hesitancy to lend money could mean that the cost of borrowing offshore goes up dramatically. That may flow through to higher medium to longer term fixed rates here.
Brian Berry is a director of Rothbury Financial Services, based in Tauranga. He can be contacted on: phone 0800 33 34 35, fax 07-5790666 or email brian@rothbury.net.nz.