YOUR MORTGAGE: Uncertain times pose rate strategy puzzle

FINANCIAL markets around the world have a decent case of the jitters at present with renewed concerns about debt (on a country by country basis) and growth, or more particularly, the lack of it.
The dreadful words "double dip recession" (DDR) raised their heads in some quarters and key international finance figures have been fast to counter that possibility as we all know these things can become self-fulfilling prophesies if not checked quickly.
Anyway, financial markets have, at the time of writing, reacted negatively with sharemarkets down around the globe. The heat has also been taken out of interest rates and swap rates have dropped considerably and we have seen the result of that over the last two weeks or so, with reductions in our fixed rates, especially in the medium to longer terms.
If the perceived outlook worsens overseas then it could provide even more attractive opportunities to lock into some medium-term fixed rates - say 18 month to three years - than where rates are sitting at present, but probably only for a short period, unless the DDR becomes a reality.
In NZ the economic data has been slightly weaker than forecast and that combined with negative Confidence Survey results and a higher NZ dollar suggests the speed of NZ's recovery is flattening out.
Saying that, NZ is still better placed than most countries and at least here the Reserve Bank has the ability to still substantially reduce rates here (if further relief was required) whereas many of the Eurozone economies and the US do not as their rates are already so low.
So, has the recent weaker data here and the offshore issues been enough to stop the Reserve Bank from increasing the OCR (Official Cash Rate) on July 29? A hell of a lot can happen in a week, but at this stage the market is still factoring in an 84 per cent chance of a 0.25 per cent rate hike. If the bank does increase the OCR then the chances of a pause on September 16 are probably reasonably likely, especially if offshore data remains weak.
With regard to an interest rate strategy, it is still difficult to pick what the best course of action should be. Any predictions are based on major uncertainties and therefore cannot be relied upon. Saying that, at the moment, if anything there appears to be no upward pressure on the medium-term fixed rates so those rates are probably unlikely to move away from current levels in the immediate future.
At the shorter end the 90 day bank bill rate has been creeping higher, reflecting the expectation of an increase in the OCR and, as we all know, an increase in the OCR is likely to feed into higher variable rates, by a similar amount.
As noted above, any predictions of what interest rate strategy will provide the "best" result are based on major uncertainties. There are more sophisticated tools that look at break even points if you fix for a period now and then go on to a variable rate or refix again, but all they do is provide a more technical version of crystal ball gazing.
For most borrowers they need to look at how exposed their cash flow is to interest rate increases (ie if rates go up to a certain level, just how affordable is that?) and then structure their borrowings accordingly. In an uncertain environment that generally means grabbing a reasonable degree of certainty and the recommendation for most is that they spread their risk with a mix of medium fixed rate terms as well as taking a (probably) small portion on a variable rate/short-term fixed rate.
I still feel the one-year fixed rate provides a good alternative to the variable rate (unless a small revolving credit facility is considered) and then consider that a mix of the 18 month and two-year rates provides a good spread of rates and certainty for a sustained period. If the three-year rate was to ease slightly more then that may come more into play also.
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