ASB suggests fixing mortgages for three years may be worth the risk

ASB expects floating mortgage rates to hit 7.75% and five year fixed rates to be around 7.5% - 7.8% by March 2016.

In its latest Home Loan Rates report, the bank said even though there were signs that domestic growth was starting to slow to a more sustainable pace, it still expected the Reserve Bank to increase the Official Cash Rate (OCR) to 4.5% by March 2016.

That's another 1%, or four 0.25% rate hikes above the current OCR level.

"We expect other central banks to will join the RBNZ in lifting rates next year too, adding to the upward pressure on term rates," the ASB report said.

The biggest increases in mortgage rates would be for those up to two years fixed, the report said.

Longer term rates above two years had already had the likely rises in the OCR factored in to them, so would not have as far to move when they finally arrived.

"Our peak OCR forecast of 4.5% implies the variable mortgage rate will reach around 7.75%. We expect short-term fixed rates to eventually settle near 7% and the five year rate to settle around 0.5% higher, near 7.5% - 7.8%, ASB said."

However the bank also warned the if the Reserve Bank hiked the OCR more aggressively than expected, to say 5%, that would lift the floating rate to around 8.25% and fixed term rates would also rise to around 8%.

"With this in mind, a key thought is that fixing for longer terms now does give extra insurance against stronger OCR increases than we are expecting," the report said.

"Depending on the borrower's risk appetite, that risk may be worth taking, and the cost of some added certainty is not high based on current mortgage rates."

Floating rates were between 6.59%  and 6.75% at the main banks, and  borrowers could fix for up to three years for under 6.7%.

That meant borrowers could lock in a fixed term rate that was lower than the current floating rate and would be even lower than the floating rates ASB was expecting to see in a year or so's time, the report said.

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