PHOTO: RAWPIXEL
A mortgage expert suggests that individuals grappling with the weight of a high official cash rate (OCR) and mortgage commitments won’t find a quick resolution to their predicament.
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As anticipated, the Reserve Bank (RBNZ) maintained the OCR at 5.5% on Wednesday. Nevertheless, the tone of its monetary policy statement was interpreted as hawkish by certain economists.
The central bank has slightly extended its projected trajectory for the OCR, indicating the necessity to keep it at its present level well into the following year due to core inflation pressures and economic uncertainties.
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According to Aaron Cooke, an advisor at Loan Market, this doesn’t bode well for those seeking to refix their mortgages this year, especially since most two-year fixed mortgage terms are currently hovering around 7%. To provide context, if you had a $685,000 mortgage in 2021 with a fixed rate of 3% and are transitioning this year to a 7% rate, your monthly payments would surge from $2900 to $4500 — a considerable and uncomfortable shift.
Cooke notes that while some five-year fixed mortgage rates are currently offered as low as 5.99%, individuals should exercise caution before locking themselves into extended terms. He cites historical instances, such as the lead-up to the Global Financial Crisis (GFC), where people locked in seemingly cheaper rates for four or five years, only to find themselves stuck with higher rates when interest rates eventually dropped.
Breaking mortgage agreements to secure a lower rate could prove challenging and costly due to break fees, Cooke explains. While negotiating improved mortgage deals might be feasible for some, banks are also grappling with increased funding costs in the current economic landscape.
Kiwibank’s chief economist, Jarrod Kerr, hopes that the current two-year fixed mortgage rates of around 7% will represent the peak for mortgage holders. Although he believes the Reserve Bank has taken effective steps to address inflation, the bank’s hawkish policy statement implies lingering concerns.
Kerr suggests that the central bank’s worry stems from the possibility that inflation might not retreat to 2% swiftly enough, prompting a potential additional rate hike.
Kerr anticipates a contraction in activity in the latter part of 2023, but he expects inflation to return to the target range of one to 3% “early next year.”
Kerr concurs with the RBNZ’s assessment that immigration, unlike in the past, is not driving inflation in the current economy. He attributes this to migrants filling vacant jobs and placing downward pressure on wages, which aligns with increasing worker supply during high demand.
However, domestically generated inflation remains a challenge, Kerr notes, as the economy shifts spending from goods to services, and construction and housing-related prices continue to contribute to inflation.
SOURCE: 1NEWS
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