Long-term rates an attractive strategy

Mortgage borrowers could be better off locking in long-term loans ahead of potential increases in the official cash rate in 2022, according to economists at ANZ. 

The bank has conducted analysis on the best borrowing strategy as long-term rates begin to rise, and short-term rates continue to fall over the past few months. 

The rise in long-term loans has been driven by rising wholesale rates, while short-term loans are more influenced by government bonds, as well as wholesale markets.

ANZ said that while fixing on short terms has "paid off" for borrowers over the past year, it could be the right time to lock in longer-term rates before mortgage rates rise further.

The bank's forecasters, led by chief economist Sharon Zollner, said longer-term rates may offer better "time protection". Economists believe rates have troughed, and expect the RBNZ to raise the official cash rate next year as the outlook improves.

"To date, falls in short-term rates have benefitted many borrowers. However, fixing for one to two years doesn’t offer borrowers a great deal of time protection and that could start to become a worry if the RBNZ starts hiking the OCR in 2022, as we now expect them to do."

The bank expects the wholesale market pressure on longer-term mortgages to continue, forcing those rates higher over the course of this year.

ANZ said borrowers "may be tempted to fix for longer" with longer-term rates tipped to rise sooner than shorter terms.

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