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Chart of the Month: How long until interest rate rises hit borrowers?

The Reserve Bank’s August 2021 Monetary Policy Statement made it clear that interest rates will continue to be pushed higher. Demand conditions across the New Zealand economy are strong, but supply issues are creating heightened labour market and inflationary pressures.

The Reserve Bank’s forward path for the official cash rate (OCR) shows increases totalling 50 basis points (bp) by the end of 2021, and then another 100bp in 2022. Mortgage rates have already started to rise in anticipation. data shows the one-year rate has risen from a low of 2.16% in mid-July to 2.41% in mid-August.

Low interest rates over the past 17 months have driven more people onto short-term fixed loans. As Chart 1 shows, nearly 66% of all mortgage lending is due to come off a fixed rate within the next year. That two-thirds proportion is the largest concentration on record going back to the late 1990s, across all repricing terms.   

This large proportion means that a lot of mortgage debt will need to be repriced in the next 12 months probably at higher interest rates than borrowers might previously have been anticipating. There’s likely to be a greater focus on longer-term rates, with households weighing up the cost of higher three-year rates, for example, against the stability of repayments that longer terms provide. The share of mortgages with more than two years until being repriced has edged higher recently, providing some indication of people’s changing interest rate expectations.

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