In the most recent announcement of the Official Cash Rate (OCR), the Reserve Bank of New Zealand maintained it at 5.5%, without further increase. However, all banks did not follow suit and continued to raise interest rates. Many people are puzzled about the reasons behind this and are wondering about the future trend of interest rates and how to fix them.  

However, the current pause in rate hikes by the reserve bank does not mean that the OCR has reached its peak. Whether there will be further rate hikes in the coming months depends on changes in inflation rate and other economic factors. Most economists predict that the OCR of 5.5% is likely to remain until the middle of next year, followed by rate cuts from the second half of 2024. 

This is good news for those who currently have loans as they can finally catch a breath. Many people were worried that their loans at the current high interest rates might become unaffordable and even considered selling their properties. 

Although the OCR has been stable in the past two months, you might be curious why banks have recently raised their loan interest rates. What will be the future trend of interest rates, and how should you choose a fixed interest rate? 

While the Reserve Bank’s OCR does influence loan interest rates, it primarily affects floating and short-term loan interest rates. Other factors influencing loan interest rates include New Zealand banks' borrowing costs from overseas and their profit margins. 

Although the OCR has remained unchanged since May, the borrowing costs for banks from overseas have increased. Additionally, the profit margins for banks have been continuously declining over the past year or two. For example, in 2021, the profit margin for banks was around 2% or higher, but now it is below 1.5%. 

In other words, even if the OCR remains unchanged, if banks want to increase their profit margins or if borrowing costs from overseas continue to rise, the mortgage interest rates offered by banks will still increase. This explains why loan interest rates have gone up despite the OCR remaining unchanged. 

Therefore, the possibility of interest rates continuing to rise cannot be ruled out, and we can only say that currently, the interest rates are close to their peak. 

For most people with home loans in number of years, they have already seen their interest rates rise to above 6%, while only a few borrowers have not experienced a significant increase in interest rates. We all hope that when it comes time to fix the next loan, the interest rates will have started to decline. 

Despite the enormous pressure faced now, if you can endure this stage, things will feel much easier later on. Let's all keep going! 

So how about how to Fix Interest Rates? If you are currently about to sign a new loan contract or need to re-fix the interest rate for your loan, I personally believe that considering an 18-month or 2-year term is a relatively prudent decision. 

If you choose a fixed term that is too short, you might still be in a high-interest-rate cycle when it comes time to re-fix, which would increase your overall loan interest costs. 

On the other hand, if you choose a fixed term that is too long, such as 3 to 5 years, although it might seem like a good idea now with lower interest rates and stability, in the long term, the actual average interest costs over the next few years might be much lower than the fixed interest costs for 3-5 years now. If you decide to terminate the contract early at that time, you might face substantial termination fees, so choosing an overly long fixed term is not recommended. 

Considering the current interest rate situation and future interest rate trends, an 18-month or 2-year fixed term is a relatively ideal choice as it strikes a balance between interest rate stability and consideration of long-term interest costs. 

As mentioned earlier, many people currently feel immense pressure and consider selling their properties. I suggest that if you can be patient and wait until after the election, you might be able to sell your property at a better price. Of course, we have seen some particularly high-demand properties being sold at prices even higher than the bank's valuation, but most properties currently are not selling at ideal prices. 

For those who are planning to buy a primary residence, I personally recommend acting as early as possible. 

On one hand, loan interest rates are stabilizing, and many people who were previously worried about affording a loan might now have more confidence to enter the market, leading to increased competition. 

Secondly, the net migration number continues to increase, with more people coming to New Zealand than leaving, which will increase the demand for properties and drive property prices up. 

Thirdly, many property investors have been in a wait-and-see mode over the past 18 months. They wanted to see the election results because current policies have significantly impacted investors' cash flows. Not only are interest rates higher, but they cannot be offset by rental income, resulting in heavy tax burdens. As a result, many investors have been reluctant to take the risk of buying investment properties. However, if the interest-deductibility policy is reversed after the election, interest rates stabilize, and many investors will re-enter the real estate market, increasing competition. 

In summary, there may be a series of changes in the future property market. If you have plans related to it, I recommend closely monitoring the election results and market trends to make more informed decisions. 

Hopefully, this video gives you some insight about the interest rate. If you have any questions, you are welcome to contact us. Will see you next time 

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.