Who can forget Yazz from the summer of 1988. I thought her song was great then, I think it’s cheesy now but if you’re wondering about interest rates in 2011 then the sentiment of the song is spot on!

The clear expectation over the last 12 months has been that interest rates will increase sooner or later. We think this should’ve happened in March – April 2011 but there was the small matter of a second earthquake in Christchurch that put paid to that! The fact is that things are on the improve (albeit still tentative and a bit bumpy) and of course interest rates cannot really go much lower. So, the only way is up, baby!

From his newspaper column on 26th July, Tony Alexander, chief BNZ economist writes:

“Recent strong economic data have led to bank fixed borrowing costs rising and this means fixed home loan rates are likely to be increased soon. For risk averse borrowers planning to fix their mortgage rates the time is at hand to bite the bullet and sacrifice the lowest floating mortgage rates in four decades in order to get protection against floating rates rising — probably from September.”

In fact Kiwibank and PSIS increased their one year fixed rate last week by 0.1%  and Westpac did the same this morning. I don’t think those rates are much to be concerned about but it does signal that an increase in rates is definitely on the cards. Other economists are more or less on the same track as Tony so our pick now is that floating rates will increase at least once this year, probably in Spring and probably by 0.25%. And remember, Spring is only a month away…

There’s also a reasonable chance that another increase of the same size will happen right at the end of the year or early 2012. All up that might take floating rates up to 6.40% by the time the summer school holidays are over. And if you happened to be reading Westpac’s ‘Economic commentary’ report published on 23rd July you won’t have missed them expecting a 3% rise in floating rates over the next two years.

Of course, no one knows exactly where things will land but it seems to me that the upward trend is clear. Against that background if I told you that today’s 2 year fixed rate was 6.40% would you take it?

The challenge for most people is swallowing an immediate increase in loan repayments in exchange for the certainty and potential protection a fixed rate provides. I guess there are two ways to look at this:

If you have a large surplus of income after living costs and loan repayments etc then there is still time to take advantage of low floating rates by diverting that surplus into reducing your mortgage. Stay floating.

On the other hand, if interest rates keep you up at night then I’d suggest you fix some of your loan right now, at least half of it.

And yes, there is a half way position – float some, fix some. Don’t forget, most banks allow you to pay a bit more than the minimum on a fixed rate loan, without penalty. The trick is to find the right balance so that you can manage the looming increase. Feel free to pick up the phone and talk to us about your own situation.

About Campbell Hastie

Cam is one half of Auckland based mortgage brokers, The Go 2 Guys.

He makes a living by sharing what he knows about mortgages with people, arranging mortgages for people and then insuring people.

He doesn't claim to know everything about mortgages himself which is why he teamed up with David Mercer — hence the ‘2’ in Go 2 Guys.

He writes posts regularly on his blog and has been told he has an ability to share his knowledge in a simple and sometimes memorable way.

Feel free to comment and ask any questions. Contact Campbell Hastie m: 027 697 7789.

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