What's Happening with Interest Rates in 2023?
Whether you're repaying a home loan or contemplating a property purchase, the state of mortgage rates is probably on your radar. After all, these rates can have a significant impact on your financial plans and lifestyle, particularly in a time when the cost of living is rising.
The past year has been a rollercoaster ride, with unexpected twists and turns that left even the experts guessing. So, let’s take a closer look at what’s been happening and what it might mean for your financial journey.
Looking Back
Mortgage rates have been on a wild ride in recent years, with unprecedented lows and a record number of OCR hikes.
In 2019, many economists were predicting mortgage rates would exceed 5.5%. Instead, rates dropped from 4.54% in 2018 to 3.94% in 2019. Then 2020 and 2021 brought unparalleled challenges due to the Covid-19 pandemic. In July 2020, the two-year fixed rate dipped below 3% for the first time, eventually reaching a new record low of 2.36% in mid-2021.
Last year, we witnessed a dramatic shift in mortgage rates due to factors such as inflation and changes in the Official Cash Rate (OCR). As a result, 1-year fixed rates rose from 4.18% to 6.83% over the course of 2022.
Fast forward to this month and rates are sitting at about 7.19% fixed for 1 year, with floating rates at about 8.5% at some banks. The Reserve Bank is anticipated to maintain the OCR at 5.50% for the foreseeable future, which should, in theory, halt mortgage rate spikes.
When Banks Go Rogue
Now, here’s where things get really interesting. BNZ started hiking interest rates on certain home loan terms this month, even though the OCR remained steady.
The bank increased rates on classic fixed terms, leaving economists puzzled. There does not seem to be justification for the raise.
At the time of writing this article, BNZ’s six-month rate is 0.2% higher than other major banks.
A Look at the Numbers
Borrowers who were able to lock in long-term home loan rates during the rate dip of 2020-2021 are now facing the stark reality of significantly higher repayments.
Take, for example, a $500,000 mortgage. Borrowers who locked in to a three-year rate of 2.83% in August 2020 would now be looking at rates of about 7.09% for 3 years.
A weekly repayment of $573 for a 25-year mortgage at 2.83% would now surge to $822 per week for the same mortgage. That is almost $1000 a month extra.
Rapson Loans & Finance Director Tristan Hewett says the evolving lending landscape means a shift in approach when considering the optimal loan structure.
“It is widely predicted that rates will start dropping in the next 12-18 months, with some economists suggesting June/July 2024 when rates might start reducing. We will remain at this peak of the shorter term rates for a little while, but the easing cycle will start next year so rates will get better then.”
With some households needing to find large amounts of extra money to cover repayment costs, it is no wonder people are unsure how long to lock in their rates for.
Where to From Here?
In the midst of all this financial uncertainty, what’s a borrower to do?
One takeaway is predictions are just that, and they are not always right. While we can’t say with certainty what the future will bring, staying informed is vital.
Economic factors – including inflation and global events – will continue to influence mortgage rates. By understanding these trends, you can make informed decisions around your mortgage.
Economist Tony Alexander predicts the one-year rate is at its peak. He anticipates rates will drop to about 6.25% by the middle of next year, with a subsequent drop to about 5.25% the following year.
Experts Guide the Way
Rapson Loans & Finance can be your partner on this unpredictable journey. We can help to take the stress out of the whole mortgage process by securing you a better deal.
Our dedicated team excels at finding the best solution for your unique situation, and all our services are underpinned by our sound financial planning and advice.
Get in touch with the friendly Rapson team today for help with locking in new interest rates.