Why this economist says fixing mortgage rates short term could pay off

As mortgage rates continue to rise it may be tempting for homeowners to lock in a long-term rate to avoid the risk of further hikes. But one expert says we could see interest rates start to fall soon.

While, right now, shorter-term mortgage rates look more expensive, a ASB chief economist Nick Tuffley says they could potentially pay off over the next couple of years. 

Last week the Reserve Bank (RBNZ) raised interest rates by another 50 basis points to 5.25 percent - a high not seen since the 2008 global financial crisis.

The decision was largely out of line with the market and most analysts, which were expecting a 25bp increase.

Tuffley previously thought the OCR would peak at 5.25 percent, but after last week's hike, his prediction has risen to 5.5 percent, while other economists have predicted even higher peaks.

Tuffley said this year will be tough for Kiwis and is expecting inflation to stay high at around seven percent for much of this year. But the good news is that Tuffley believes "we're near the end".

"This year is going to be pretty tough. It's when a lot of the pressure from the cost of living [and] from high-interest rates is still coming on," Tuffley told AM on Friday.

"Next year, if we see interest rates coming down, as we're looking ahead to, we will start to see things turning around."

He forecasts the RBNZ will cut interest rates next year which will ultimately see mortgage rates decrease. That brings a tough decision for homeowners. 

"The longer you fix, the more you risk locking in at a very high rate for a long period of time," Tuffley said.

"Your balance at the moment is you can get lots of flexibility and it's very tempting if some of the long-term rates are lower than the short-term rates to lock in those rates because they look cheaper. 

"The thing to bear in mind is to think over the next say five years if interest rates do come down what's the trade-off - how much do you value that certainty, how much are you prepared to say wait a little bit and see if rates come back down."

ASB chief economist Nick Tuffley.
ASB chief economist Nick Tuffley. Photo credit: AM

For example, at the height of the Global Financial Crisis in 2007/2008 the OCR was 8.25 percent, the highest the OCR has ever been.

However, the OCR then tumbled to 2.5 percent in 2009 - meaning anyone who had locked their mortgage in for years at a higher rate was stuck paying high-interest rates while banks lowered mortgage rates.

Tuffley said looking purely on a cost basis, the shorter-term rates look more expensive at the moment but could potentially pay off over the next year or two. 

But, ultimately, it comes down to homeowners' individual circumstances. Tuffley said some people may not be able to tolerate the risk of rates going up much further, while others may have a high-risk tolerance and be comfortable taking that risk.

"Those factors are also very important for people to think about," he said.