Interest rate rises could be just around the corner, with ASB bringing its forecasts forward to May next year.
It comes as New Zealand and global economies continue to recover from COVID-19, creating less of a need to keep emergency interest rate settings in place.
On March 16, 2020, the Reserve Bank cut the Official Cash Rate (OCR) to a record low 0.25 percent to help the economy through the pandemic, keeping it at that level for at least 12 months.
Releasing its May Monetary Policy Statement, the Reserve Bank left the OCR unchanged but its forecast interest rate track indicated it would rise 150 basis points to 1.75 percent in mid-2024. Talking to The AM Show on Thursday, Reserve Bank Governor Adrian Orr said that if the economy unfolds as expected, the OCR could rise as early as "mid next year".
Economists have been quick to adjust their forecasts, with ASB and Kiwibank saying they now expect the OCR to start rising earlier, with a 25 basis point rise pencilled in for May 2022.
Releasing its weekly economic report on Monday, ASB said we're likely to be at or past the low point for mortgage rates. As economic recovery following COVID-19 continues both locally and overseas, the bank expects pressure to start building on longer-term mortgage rates.
It's forecasting the OCR to peak at 1.25 percent in late 2023 or early 2024 - a percentage point higher than where it currently sits.
"It does feel like we've turned a bit of a corner… it's good that the economy is going so well that we're starting to think about removing some of these emergency measures over the next year or two," ASB wealth senior economist Chris Tennent-Brown said.
Rather than rise quickly, the bank expects retail mortgage interest rates to stay low over the year ahead. The Reserve Bank Funding for Lending programme, essentially a pool of funding at the Official Cash Rate available for banks to lend*, could result in some interest rates going slightly lower.
But as economic improvements build momentum, the risk is that interest rates start moving higher sooner. Noting ASB's forecasts are slightly more upbeat than the Reserve Bank's, by 2025, the bank anticipates retail mortgage interest rates could be 1 to 1.5 percentage point higher than now, but still low by historical standards.
"We've bought our forecasts for rate increases forward [towards] the start of next year rather than the back end of next year, like we thought a few months' ago," Tennent-Brown added.
So what does that mean for borrowers?
Many have their mortgages on long-term fixed rates, so won't be affected until the end of their current fixed interest rate term.
New borrowers will need to ensure they can afford the repayments at a slightly higher interest rate, which bank 'stress tests' generally take into account.
"If things keep panning out along the lines of [ASB's] forecasts or the RBNZ's forecasts, we think mortgages will go from these areas in the low 2's up to the 4-to-5 percent range in 2023-2025," Tennent-Brown said.
Borrowers concerned about higher rates could get certainty by fixing a longer-term rate now. Another option is to split the mortgage, choosing different interest rate terms for a portion of the loan.
"[Borrowers] need to think about what's the thing that's most important: is it certainty, flexibility or a bit of both," Tennent-Brown added.
Kiwibank has also pulled its forecast of an interest rate increase forward. Earlier this month, it forecast the first OCR hike in November. On May 26, it forecast the first rise in May, followed by another in August - a total of three rises to 1 percent next year.
Kiwibank chief economist Jarrod Kerr said around 60 percent of Kiwi mortgages are on floating rates or are due to roll off fixed rates in the next six months - 80 percent will roll off over the next six to twelve months.
Kerr expects to see "a strong bout of mortgage-related fixing" as borrowers wanting certainty amid rising interest rates start locking rates in for longer.
*The Funding for Lending programme was introduced by The Reserve Bank in December 2020 to reduce funding costs and help lower interest rates. It is one funding source available to banks, along with deposits and wholesale funding.