The end of historically low interest rates is near

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The era of historically low interest rates is coming to an end, but borrowers shouldn’t worry about being hit by a sudden and sharp rise in costs.

The SBA raised interest rates on three to five year home loans on Friday as expectations of a global economic recovery strengthened.

This decision came after a long period of historically low interest rates. This measure predated Covid, but was reinforced by the Reserve Bank’s Covid response, including its quantitative easing program and the reduction of the official treasury rate (OCR) to 0.25%.

Following ASB’s move, economists said short-term one-year and two-year fixed rates were unlikely to rise this year, but it raised questions about what the future might look like in the future. reserve for interest rates and borrowers.

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Sharon Zollner, chief economist at ANZ, said there is currently global pressure on long-term rates and the Reserve Bank’s quantitative easing program has gained momentum.

This meant that it was likely that interest rates had hit the bottom of the current cycle and that, for mortgage borrowers, rates were now probably “as good as they can get,” she said.

“But we don’t expect the reserve ban to lift the OCR at least until the end of next year. If past trends continue, it means that we are unlikely to see a significant change in variable rates or one year for at least another year. “

While they did not anticipate any short-term rate hikes and chose that any long-term rate hikes would be gradual rather than steep, there was no guarantee that this was happening, Zollner said.

According to Sharon Zollner of ANZ, mortgage borrowers can hedge the risks of rising interest rates by providing longer-term solutions.

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According to Sharon Zollner of ANZ, mortgage borrowers can hedge the risks of rising interest rates by providing longer-term solutions.

“Central banks should not aggressively raise rates, but inflationary pressures are mounting. There is an extreme risk here and they might be forced to increase them more than expected. “

For this reason, borrowers should consider the implications of this for mortgage rates over the next several years, she said.

“Borrowers who are concerned about the possibility of rising mortgage rates can hedge that risk by adding longer-term solutions to the mix.

“If you take a longer-term view of reducing interest charges over the next five years, rather than the next two years, it becomes less of where the one-year rates might be in. a year and up on where, say, the 2, 3, or 4 year rates may be next year. “

Rates are now expected to rise from here, says Gareth Kiernan of Infometrics.

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Rates are now expected to rise from here, says Gareth Kiernan of Infometrics.

Infometrics chief forecaster Gareth Kiernan agreed that while there was upward pressure on long-term rates at the moment, there was not with short-term rates.

Persistent economic uncertainties from Covid meant the Reserve Bank was keen to keep interest rates low, but there had been a shift in economists’ expectations, he said.

“Previously we expected rates to drop even lower, but now most would agree that the most likely direction for rates from here is up, even though this would be a gradual rather than a rapid increase. ”

A sharp rise of a few percentage points could prove to be a problem for many high-leverage mortgage holders who had borrowed at the height of the market, Kiernan said.

“But for people who bought a property in the last nine months or so, the banks would have factored a higher than normal rate into their service criteria, so there is a bigger margin.”

Also, for most short-term fixed-rate borrowers, if short-term rates increased a little later in the year, the rates they would need to reset would likely be even lower than they were. a year ago, he said.

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