Are long-term rates the best bet?

Mortgage borrowers need to start hedging against the risk that interest rates will rise and move in "unpredictable" ways, according to economist Tony Alexander.

Friday, March 19th 2021, 9:23AM

The seasoned economist believes it is time for borrowers to stop trying "to get the lowest possible interest rate cost and start hedging against the risk that rates move in unpredictable ways in coming years".

It comes as global bond yields rise, and interest rates increase, as financial markets expect strong economic growth.

Alexander favours locking in longer-term rates and securing low interest on five-year terms.

"Strong protection for a homeowner can come by fixing everything at five years. But that creates a rate reset risk in five years time. Personally, if it were my mortgage, I’d probably accept that risk and focus on getting the principal down as much as possible in the next half-decade."

He said a mix of five-year fixed rate funding and shorter terms is "probably best" for most people.

While many borrowers are holding off fixing longer terms, Alexander warns rates will rise more quickly than expected.

"Fixed rates rise in advance of floating rates as a rule. This is because they reflect expectations of future monetary policy stretching over a number of years and not just where the central bank’s overnight cash rate is now and where it will be in three to six months."

He said it would be near impossible for homeowners to second-guess the Reserve Bank.

"So, when considering how to manage your interest rate risk don’t think only in terms of minimising cost. Think also about the low predictability of rate movements and the need to spread your exposure to rate changes down the track which might not come when people expect."

Alexander's comments follow recent opinions from ASB, which also suggested long-term rates were a good bet in the current market.

HSBC offers the lowest five-year rate at 2.89%, while banks including BNZ, ASB, SBS, TSB and Westpac have 2.99% five-year terms.

Tags: fixed rate mortgages interest rates Lending Tony Alexander