Mortgage strategy dilemma

Borrowers could be better off fixing low-cost short term mortgages and rolling them over a five year horizon, despite expectations of rising interest rates, according to ASB.

Nick Tuffley

The bank has published its latest home loan rate report in which it suggests the official cash rate will begin to rise from November, peaking at 1.5% in 2023 and 2024.

The lender's economists believe that rates will settle around "historically low levels", but slightly higher than its previous forecasts. 

Reviewing different potential mortgage strategies, ASB's forecasters said choosing shorter term loans, and re-fixing each year, could be the best option for many homeowners.

However, there is a growing risk that rates could rise faster and higher than expected, impacting borrowers following this strategy.

"Fixing for the lowest cost shorter terms and subsequently rolling fixed term mortgages is forecast to be the cheapest option over a five year time horizon. However, this strategy looks increasingly exposed to the risk of a faster than expected unwinding of monetary support, and a higher endpoint for the OCR (and mortgage rates) than our earlier forecasts."

The economists called on borrowers to plan for rising rates, and said some may prefer the certainty of a longer term fixed rate.

"Borrowers are prudent to do their budgets on higher interest rate costs rather than the rates on offer today. For those who want longer term interest rate certainty now, the cost of fixing for two to five years is still very low compared to the past twenty years."

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