Predicting the rise and fall of interest rates is surprisingly easy, so long as you look in the right place. Predicting when, and by how much is the hard part.
I like to watch the Reserve Bank of New Zealand for clues to what’s coming next.
If you’re a borrower, here are the three things you should be thinking about over the next five years.
1. Central bankers shouldn’t be this famous, but they are. Pay attention.
Seven times a year, we await the Reserve Bank’s decision on the Official Cash Rate (OCR) as if we were spectators at a modern-day papal conclave.
Instead of spotting smoke signals from their monetary policy meetings, we listen for any changes to the interest rate that applies for overnight loans between banks.
These changes influence mortgage and term deposit rates, so if you have a large mortgage you should care.
The faster we go and 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 a borrower (or already are), watch what these people do.
2. 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, as long as you still have an 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:
- 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 for long periods of time before inflation becomes a problem again.
3. Beware of the porpoise
‘Porpoising’ is when a power boat bounces up and down on the surface, much like porpoises or dolphins leap out of and back into the water. The Reserve Bank, partly because it uses historical data, sometimes doesn’t act fast enough.
In 2020, it kept the OCR too low for too long, and in the first half of 2024, it kept 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 Reserve Bank piloting a financial system in need of a redesign, 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 looking at all the bad things happening 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 is being reported, staying on a floating interest rate or fixing for a period of six months would be an understandable strategy. At the end of six 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 you start to see it again.
Starting a family, going down to one income or 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.
This column does not constitute financial advice. If in doubt, reach out to mortgage adviser for advice around your current situation.
