Business / Economy

Mortgage broker says most home owners not in for huge shock if interest rates hiked

11:02 am on 28 January 2022

A mortgage broker believes most homeowners will not be in for a huge shock if interest rates are hiked to combat inflation.

Photo: 123RF

Inflation has hit a 30 year high of 5.9 percent and is expected to go further this year, resulting in the Reserve Bank increasing the Official Cash Rate (OCR) steadily through the year starting next month.

Economists are picking the benchmark rate to hit between 2 and 3 percent, which flows directly to borrowing rates.

But John Bolton from mortgage broker Squirrel said banks had already priced in OCR increases in their existing interest rates.

An OCR of 3 percent would likely result in floating mortgage rates similar to the long-term rates offered today, he said.

"I think for homeowners out there, it's not that [floating] rates are currently 4 or 5 percent and it could go to 7 percent.

"The reality is that short-term rates are around 3.5 percent. People that are fixing for two years are probably fixing around 4.5 percent anyway and we don't really expect to see rates move much from that.

"What you are going to have out there is all this talk about the OCR increasing, but what people need to realise is that's mostly priced into fixed rates already."

Bolton said people coming out of low fixed interest rates would need to adjust to higher rates.

"Clearly rates got as low as 2 percent over the last couple of years. As they come off fixed rates - and obviously going into a higher rate environment - that's going to require a bit of belt tightening."

Bolton said the belt-tightening was a normal response to any interest rate hike.

"The challenge is for those that were hoping that interest rates would stay around that level for a lot longer and clearly that hasn't happened."