Chapter 1: What is the main topic discussed in this episode?
Kia ora, I'm Nadine Higgins and welcome to The Prosperity Project. Banks are starting to push up interest rates, even though the Reserve Bank hasn't yet hiked the official cash rate. So has the next interest rate hiking cycle started already? And if so, what do you need to know to ensure you and your mortgage are ready for it?
Adam Clark is a mortgage advisor at Squirrel Mortgages, and he's with us on the Prosperity Project. Hi Adam, welcome to the Prosperity Project.
Thank you so much for having me.
Why are the banks hiking rates now when the Reserve Bank hasn't done anything yet?
Yeah, it's a really good question and it's really based on that common misconception around the OCR is directly tied to fixed rates. And it's a really important kind of message to get across to people that actually the OCR affects funding costs directly but fixed rates are more based around the wholesale market's expectation of the OCR in the future.
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Chapter 2: Why are banks increasing interest rates before the Reserve Bank?
And that's the real disconnect between the two, the OCR's all around costing now and whereas your ones to five, your fixed rates are around where the market thinks things are heading. So at the moment it's only heading one way.
Right. So this is the market signal. Expect the interest rates hiking cycle to begin.
Yeah, exactly. And if you break it right down to the basic mechanics, essentially rates go up in order to make things more expensive. We then have less money to spend. discretionary spending goes down, businesses can't put their pricing up, inflation's under control, is essentially the idea, right?
So when you look in the world at the moment, you go, okay, one of the core costs of production, i.e. fuel, has gone through the roof.
Chapter 3: What should homeowners know about preparing for rising interest rates?
And so we then go, okay, cost of production's going up, businesses are going to have to recoup that cost somewhere, and we've seen it already. There's been temporary, short-term kind of pricing adjustments based on fuel. But also the thing that people... I don't know necessarily that they've got the heads around the fuel issue, is it's not just what goes in your car.
It's a core material and a huge amount of production.
Yeah, condom makers even put up their prices because it is, exactly, it's part of that process.
Totally. I mean, how much plastic is there in this world, right? And it's almost entirely petroleum-based. So the core kind of manufacturing costs of all of these products that we use day-to-day are all going to increase accordingly.
I don't want to go down too deep in economic analysis well with you, but some people might say, aren't those higher prices already putting a squeeze on businesses and households and doing some of the work of slowing things down and avoiding the ability to be able to hike prices? Why do we need higher interest rates as well?
Yeah, and that's a really good point. And it's a very interesting kind of conundrum for the Reserve Bank to be in because they have a single mandate. just bought into legislation, you know, under the current government, they are responsible entirely for inflation. Keep inflation under control and nothing else matters.
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Chapter 4: How can focusing on small rate differences hurt mortgage borrowers?
Yeah, they don't have to worry about unemployment anymore, do they?
Correct, correct. And that's where, like, we've seen a little bit of a change in the wholesale rates recently where
you know different terms will adjust based on market expectation right and so sometimes you know the market will go if we go back to say midway through last year the market all of a sudden decided there are some you know some quote-unquote green shoots in the economy and we're expecting some some you know some stronger future performance so we started to seeing wholesale rates going up in the kind of the three the four the five relatively sharply based on the fact that the economy is going to be stronger in the future
Whereas we look at now and we're starting to see sharper increases in short-term wholesale rates. And what that says to me, and this kind of touches on your point perfectly, that short-term spike relates to the current increase in fuel cost. But actually what I think will come through is that cost of living pressures are so strong at the moment, people are not going to be able to spend.
And so expectation, you know, you read the tea leaves, so to speak, is that inflation will hit us hard in the short term based on the cost of fuel. And then actually the flow on effect of that is that the interest rates don't necessarily need to stay high.
Because cost of living pressures are so high that the minute you put interest rates up further, people are going to be pretty tight pretty quickly. And so we should have some quick impact or some quick kind of relief from some of those increases.
Because I guess what some people will remember viscerally from the last interest rate hiking cycle is they went up fast.
Yeah.
And your head was spinning. If you were sitting on a fixed rate, you were anxious for that to come off so that you could lock something in that wasn't going to be sky high. But I think what you're saying is you're not expecting that this time around.
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Chapter 5: What are the implications of refinancing and cashback offers?
There is an approach to that because you need some security. You cannot afford significant rate hikes. You want to lock in some security, kind of hunker down and enjoy, you know, this significant change in your financial life.
If you've had a mortgage for 10 years and things are under control and actually your income is good, jobs are stable, you're working on strategies to get yourself debt free faster, entirely different conversation. And it's a really good example of same economic context, same pricing offers, entirely different conversations to be had with those two people.
So do you think we spend way too much time wringing our hands about trying to get the best possible, you know, the extra five basis points or whatever of our interest rate rather than like what's actually going on in my particular finances?
A hundred percent. I couldn't agree more. We get so focused on chasing 0.1 of a percent.
when you actually convert that into repayments and it's a really interesting exercise to do with people because they they see an interest rate they see the difference between the two and automatically in their minds they go oh that's a significant change that's going to really change my life and you're like actually hold on a minute when you look at the portion of your lending that we're adjusting your five basis points is is like two coffees a week
And they're like, hold on a minute. This actually doesn't really matter. So are we chasing short-term wins, chasing those two free coffees a week, or are we better to take a step back and go, actually, is there a strategy that we can put in place where you've got pricing security and actually your repayment kind of strategy aligns with your ideal fixed rate setup?
You know, are we talking, you know, balancing some short and some medium to, you know, give you the best of both worlds, you know?
Is it tough advising on interest rates at the moment? Because it feels like we keep saying unprecedented times, the only certainty is uncertainty. Do you have people come back to you and be like, Adam, you told me to go short and I should have gone long or vice versa?
A hundred percent. And it's the beauty and the curse of the role, right? But that's absolutely why we're here. We can't make decisions for people. All we can do is try and provide enough clarity that they can make an informed decision with some confidence. It's awesome when people come back two years later and be like, I've just had the most awesome two years with my interest rates.
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Chapter 6: How does fixing a mortgage for a short term impact financial strategies?
It's the bank's way of going, hey, look, thanks so much. Here's a contribution towards the cost of borrowing, legal fees, moving house, et cetera. So At the moment, the kind of quote unquote norm is about 0.9. So if you borrow $500,000, you'll get four and a half grand in cash. Now that is available pretty much across the board, new to bank customers, regardless of what you're doing.
So you're getting your first home loan, As long as it meets particular criteria, five grand in cash, thank you very much. The only condition on that money is you stay with that bank for either three or four years. So literally, it is free money, right? And it's a really interesting conversation around refinancing. So refinancing and refixing, people often mix the two up.
Interchange, yeah.
Yeah, so refixing is simply locking in the next interest rate with your current bank. So you go from one interest rate to the next, that's your refix rollover, as you might say.
the refinance on the other hand is changing from one lender to another so when you change from one bank to another you then become a new to bank customer you get new to bank customer cash back so standard process for us and really industry standard process should be we'll go back to your existing provider and say hey look you know john and jane smith are exploring their options we want to get some cash retention to keep them how common is that
It's a really to be honest with you. It's the bit of the industry I really don't understand, you know as a new to bank customer They will give you 0.9 any day of the week. No questions asked. It is just a standard offer, right? Whereas to keep you even though you're outside your three-year agreement You're free as a bird to go somewhere else.
You've got no interest rates tying you to that bank they might give you a 0.3 0.4 maybe and
Whereas if they had to go out and replace you as a customer tomorrow, they'd give that person 0.9.
Correct. And this is the bit that I don't understand from a business perspective. I mean, anyone who owns business understands, you know, the acquisition costs of your customer.
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Chapter 7: What should you consider before putting a car on your mortgage?
We want to maximise the 1% lending while we can. What you want to do is make sure you're being selective around where you pay down your debt. So if you've got a 5% two-year fixed rate, if your bank allows it... prioritize paying that off first. And now most banks will. Sometimes there's some break fees, there's some bits and pieces.
Worst case scenario, put some cash away into a savings account and use the ability then to pay a lump sum instead. Where you're putting your cash flow is super, super important. The low interest rate trap that everyone falls into is, oh, my mortgage is so cheap. This is fantastic. I'm going to go shopping and I'm going out for dinner and that holiday looks cool and you live the good life.
Which is what we all did when it was at 2%, right? Unfortunately, too many people did that.
Totally, totally. And then they got whacked because they just couldn't cope with the increasing costs. Human beings, we spend money because we have money. It's as simple as that. We have to be more disciplined to make better choices. Otherwise, that sunny day will come to an end at some point in time and you need to be in the best position to cope with it.
That's why they say you've got to make hay in those circumstances.
Correct.
Just to bring us back to where we began, which is the start of an interest rate hiking cycle. If you were someone who was worried about that, what would be on your checklist of things that you should do now before it begins in earnest?
Yeah, look, I think I'm going to sound totally biased saying this, but the best thing you can do is go and get some independent advice.
I can't, you know, I can't emphasize that enough because I think the problem that we all face is that we become so entrenched in our own mindset and our own beliefs and, you know, and it's so important to pause and take a minute and actually help someone give you some clarity over what's going on.
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