Hello, worried about rising interest rates?

Matthew Dawe, Mortgage Broker and Financial Adviser here. And today, I'm gonna cover off some why we are, where we are in terms of interest rates, where are they going and some short case studies with some advice and what other clients have selected.

So firstly, interest rates. I'd like to just start with how rates actually work. Now, imagine you're walking into a supermarket and there's products available that have been supplied by your supermarket. Now, you can choose what you wanna buy. It's the same with mortgages. Instead of the supermarket, you've got a bank, and the bank goes out to borrow and source that money for you.

So, where are they going?

Well, they go to term deposits in New Zealand. So, they're borrowing it from other New Zealanders. If you've got money in a term deposit and you'll be help funding mortgages, they go to overseas markets, and the market for money is huge and it's global.

I'll give an example.

If you're contributing money to your KiwiSaver, you might be helping fund mortgages either in New Zealand or in other banks around the world. So, New Zealand banks will go out to those markets and they will borrow money and make that available to you as a consumer in the supermarket. Obviously, they make a margin off that and our job is to get the best deal, and the best products, and the best advice as well. That's how it works.

So, with interest rates, why has interest been rising in the last few months?

And the answer is, because the cost of living in general has been going up.

Now, what does that really mean?

It means that the cost has gone up, the cost of the money. So, if a bank has to pay more for the money, then obviously they can't supply the milk or the bread or the other products at a lower price. The price goes up and the reason is because there's lots of demand for money globally. You've got governments which is hugely indebted, including the US, Europe, especially France, got big problems in other countries as well as corporations. A lot of corporations borrow money and they're called bonds. In fact, all of these are bonds. There's been a lot of borrowing in the AI sector to fund a lot of investment and creating a huge boom and lots of borrowing there. So, there's huge amount of demand for money.

So, what does that mean?

The cost of money goes up. So, if there's lots of demand for something, that's generally caused the general increase in interest rates as well as the oil price.

So, why does the oil price mean that interest rates on your mortgage go up, Matt?

It doesn't make sense. You're like, well, actually it does.

So, let's just say the truck that drives from the port in your local city, in Auckland, Tauranga, etc., has to drive, or the train, a lot of the trains are electric, but not a lot of the transport ones, has to drive from the port to the supermarket to deliver the bottle of milk. That truck runs on diesel or fuel. Also, all the packages are in plastic, which is all oil. And the driver had to drive to his work in a gasoline-powered car, in a plastic-filled car. And it goes on and on and on and on.

The cost of oil feeds into everything. So, what happens is when you go to buy that bottle of milk at the supermarket, it includes a big oil premium. It's energy cost. And whether we like it or not, that does exist. So, what happens is, when the cost of oil goes up, it feeds into everything, not just the price that you pay at the pump. That's obviously what you notice, but it includes pressure on everyone and every cost of items.

So, what does that do?

Pushes up the price of everything. So again, the Reserve Bank responds to that because they don't want prices getting into a runaway situation. So, they want prices stable. That's their job. So, they will actually increase interest rates to reduce demand, to get the prices more in equilibrium. We can go into more detail about that, but essentially, it's bad. So, that's why interest rates have been rising half to do with the cost of money, half to do with the oil price.

Also, the Reserve Bank in New Zealand has wanted, we've had ultra-low rates because the economy has been very, very soft in the last couple of years. And they've said that they wanna get off those ultra stimulatory rates. They don't want rates being too long and causing a huge boom in New Zealand, which is what happened every decade for the last four or five decades, if you're a citizen here.

Boom bust, boom bust, boom bust. Booms are great, busts aren't so much fun. So, they want a more stable, even keel, if you wish, which is a good thing for the country overall.

So, where to from here?

So, that's why we are, where we are. This is a really difficult question to answer. So, interest rates have been rising globally now. Two big banks have come out this week and said there'll be another two interest rate rises. I think that's already priced in to the 3, 4, 5-year fixed interest rates.

The cash rate or the OCR what banks paid, kind of like, Reserve Bank sets the wholesale price of which all interest rates in the entire economy are priced off. For example, New Zealand government borrows based off the cash rate as well. It's kind of like a cost for the currency, for the New Zealand dollar, if you borrow in Kiwi dollars.

So, if we've got rising interest rates moving forward, which is probably what we have, it's probably going to not as affect the short end of the curve. What I mean by that is the short end. So, the 6-month and 12-month rates, generally rise in line or more strongly with the Reserve Bank rate. But the longer term rates, the 3, 4, 5-year fixed, they're priced more off international markets.

So essentially, if you wanna lend money to a bank for 5 years, that's what governs the 5-year rate. So, I think those interest rate rises are mostly priced in to the 3, 4, 5-year fixed, but the short end is gonna go up. The 6, 12-month, especially the floating rate, is gonna go up in the next few months. Just giving you some information there.

Personal opinion, and I've got some case studies for you shortly. Personal opinion is on this sort of stuff. I'm worried because the economy is still not strong, and interest rates are rising pretty strongly, but also that, there's further rates rises expected.

Australia has much higher rates than New Zealand. They're gonna grind to a halt. I think you've got big problems in France, UK, US is obviously massively indebted. You've got a huge AI boom funded by debt as well as an overpriced stock market throughout the entire world. So, there's a lot happening at the moment as well as the oil crisis, and their war, and all that sort of stuff.

New Zealand is in a relatively good position, which is good, but I'm worried about rates rising more moving forward. Ultimately, it could cause a recession at some point, not just for New Zealand, but also, around the world. If that happens, surely rates have to be cut, right? But it's the delay that causes the problem. So, if a recession happens, there's less demand, there's less inflation, and rates get cut. Or if there's a resolution in the war. But I think their short-term pressure is only increased in the last three to six months.

I didn't think rates were gonna rise as fast as they have done, same as I didn't think last time they were, but this thing, it's really difficult to predict and not advice, obviously. Trying to pick rates is a really difficult thing. I think when you're still borrowing around that sort of 5% for mortgages, still not too bad. Even two years ago, we were probably at 7%. So, we're still in a relatively good position.

Case studies.

I've had clients all over the place on interest rates. So, I've had clients that were coming off lower rates and they've said to me, Matt, if I'm gonna be paying higher interest rates, I just want the lowest price I can get. So, we've had a lot of clients go 6-month fixed as a result of that, which is the lowest price on offer. And therefore, they've limited how much more they've had to pay because the 6-month rate has been the cheapest. I've even had them say, hey Matt, I realise I might have to pay a little bit more in 6 months' time. That's fine. I'll deal with it then, but I'm just hedging my bets.

Now, ultimately, you can't lose in inverted commas if you're taking the lowest price, right? Because that is the lowest offer at that point. The trade-off is that the longer you fix for, the more you pay for it. So, the cost is the rate. The certainty is what you get. So, it's a trade-off. For higher certainty, you've got higher costs. You can't have both with interest rates. So, maybe there's a middle ground there for most people.

I've probably had first-home buyers tend to spread a little bit, 1, 2, maybe even 3 years a little bit, as they want a little bit more protection because they've just invested and bought their first home and they're feeling a bit poor and they want a bit more certainty. I've had a lot of clients go 1 year. This seems as the 2-year is pretty popular at the moment. I've had one gentleman, he went out to 4 years, which he's done before, but nothing wrong with that. He was thinking sort of mid-fives. He's like, Matt, mid-fives for 4 years. I'm pretty happy with that. Rates could go into the sixes. So, he's got a bit of protection, although, he did split it up.

So, as you guys know, my opinion on this sort of stuff is, New Zealand's a small country for five and a half million people. It's really difficult for us to borrow long term at cheap rates. It's just the size of the country and the risk profile that we have. Therefore, shorter term generally tends to work quite well.

Why?

Because it's the cheapest. It does mean we're a little bit more exposed to rising interest rates, but as well as that, if rates drop, well, we get the benefit much more quickly. So, that's it for interest rates.

I hope you've enjoyed this little update. Basically, if you know anybody that you think might find it beneficial from this video, please forward this to them. We offer free strategy session consultations where you can discuss your situation and talk about next steps.

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Matthew Dawe
Mortgage Broker | Financial Adviser
Phone: 027 321 4287
Email: mortgages@matthewdawe.com
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