Mortgage rate forecast for 2015

Arrow signs pointing in opposite directions

The 'good news' is that mortgage rates will stay low. The main driver will be lower commodity prices killing any notion of inflation. Dairy prices will reduce our income by $7 billion this year. Meanwhile over the ditch a 50% drop in Iron Ore prices has wiped $16 billion from Australian income. If you haven't already, read 'Big Economic Trends' to get a sense for what's going on and what it could mean.

Nonetheless, we have enough good news locally that the probability of the Reserve Bank lowering rates is negligible. High immigration, increasing house values, and a high NZ dollar will keep the Reserve Bank in a holding pattern for most, if not all of this year. As a result the interest rate curve is very flat with similar rates from 1 year to 5 year fixed. It can't really get any flatter without an OCR decrease, so rates are about as low as they will go. Don't expect the 1-year rate to drop and don't expect rates to get down to below 5.00%. This would take the Reserve Bank to drop the Official Cash Rate (OCR) at least twice. Longer-term rates could easily kick back up again (by around 0.50%) if the US looks like it will increase rates, or simply due to high borrower demand to fix.

If you intend to fix, then don't procrastinate and get it done. There is no point staying in a floating rate. You will be paying more interest than if you fix it. Most borrowers on a floating rate will be paying 6.00%-6.25% compared to fixing at 5.50%. With fixed rates, some lenders allow borrower's to make extra lump sum payments and to also change repayments, so you'll have some flexibility with a fixed rate anyway. In my opinion the best value for money is around the two and three year fixed rates which range around 5.45%-5.60% and 5.65%-5.75% respectively.

Some lenders are now offering 5 year fixed rates at 5.95% and that is an exceptional rate for clients needing a degree of certainty or investors wanting to diversify their interest rate risk. It is still a fairly long term rate, so not suited to everyone. Make the most of the low rates and pay off debt as quickly as possible. Paying off debt, or at least making sure your financial risks are well managed, are both very important in our current economic environment. Eventually when interest rates do increase, it wont be by much. We believe that lower than normal rates are here to stay and we've been consistently saying that for some time now.