Interest rate warning for borrowers

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ASB is expecting floating home loan interest rates to reach 6% by March next year.

Tuesday, May 7th 2013, 6:00AM 3 Comments

by Susan Edmunds

At the moment, it is offering a rate of 5.75%, roughly the middle of the market. But it expects a gradual increase in the official cash rate over the next couple of years to push up interest rates across the board.

Mortgagerates.co.nz polled some of the country’s economists on what they think home loan borrowers will be paying over the next few years.

UBS expects the rise in interest rates to happen much faster than other pundits are predicting. Its economists are picking a median floating rate of 6.6% by next March, up from 5.8% now.

All of the economists expected some movement in the rates borrowers pay by the end of the year. By the end of next year, they all expect floating rates to be at least 6.4%.

By the end of 2014, Infometrics is picking a floating rate of 8.8% and ASB forecasts 7.25%.

They were also asked about their predictions for the Official Cash Rate. All expect the next move in the rate to be a rise of 25 basis points. None expected the rate to be cut.

JP Morgan and UBS expect that rise to happen in September while ASB, BNZ, FNZC and Infometrics think it is more likely in  March next year.

From there, they all expect the rate to steadily climb. BNZ expects it to reach 4% by December next year and Infometrics expects it to climb to 6% in March 2016.

ASB and BNZ both expect the rate to level out once reaches a peak of 4% and 4.5%, respectively.

ASB economist Jane Turner said that would take mortgage rates to about the historic average and reflected a neutral setting for the economy.

She said there was an increased level of sensitivity to interest rate movements in the market because of the amount of money out on mortgages.  The high levels of debt would mean the Reserve Bank would not have to be so aggressive with its monetary policy to have an impact, she said.

She also expected the dollar to remain strong, which would do some of the work that monetary policy would usually have to do.

Turner said ASB had been warning for some time that borrowers needed to be prepared for the possibility of rising interest rates.

But she said the Reserve Bank would be raising rates in response to increased household incomes and better confidence levels. “Rising interest rates would probably offset that slightly but I don’t think households will struggle – the rate will be rising because things are improving.”

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