YOUR MORTGAGE: Rising interest cycle is under way, so look to mix rates over two years

RATHER surprisingly, it took until Friday last week for the increase in the official cash rate (OCR) to start feeding through to home loan interest rates.
One major bank took the lead and others have now started to follow.
It is interesting to note that the increases have only been at the short end, with the variable out to one-year fixed rate being the only movers.
At the variable end, the increase has reflected all the OCR rise (or close to it), while the one year rate has only increased by 0.1 per cent. The OCR was increased by 0.25 per cent.
This minimal increase in the one-year and the lack of movement in the 18-month and plus fixed rates follows a drop in the wholesale market for those medium to longer terms.
Market pricing is allowing for increases until the end of 2011, with none after that. That market pricing appears to be highly optimistic, with some economists projecting rate increases until early/mid 2012, probably with some pauses along the way. Once again, there will be a strong offshore influence in where these medium to longer term rates end up.
In recent weeks, while we waited with some uncertainty about when the increasing interest rate cycle would start, we have talked about the option of taking a mix of mortgage rates, including a portion on the variable and some on the 18-month and two-year fixed terms.
Now that the increasing cycle is upon us and, presuming we will still stick with the strategy of having some exposure on the 18-month and/or two-year rates, we should probably review the option of fixing a variable portion. Given that the OCR and, presumably, the variable rate will probably increase say six to eight times over the next 12 months, it would take the variable to between 7.5-8 per cent.
The one-year fixed rate now sits at about 6.45 per cent, which is only about two 0.25 per cent increases from where the variable rate sits at the moment.
Those two increases are likely to happen on July 29 and September 16, so it would appear that a one-year fixed rate is going to provide more value than the variable over that 12 months. In an uncertain world, I still favour some certainty. I like including a mix of fixed rates for a reasonable period and consider that the 18-month and two-year rates provide good certainty for a sustained period, without being locked in for too long.
Saying that, we do not know how long rates will remain elevated at the end of the increasing interest rate cycle or, in fact, where and when the rates will peak.
A mix of rates provides a good spread of risk as far as timing is concerned, and should provide a reasonable overall result over the next couple of years.
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