A net 64% of respondents to the survey expect house prices to keep rising over the coming 12 months.

That represents a bit of a wobble from last quarter’s 73% all-time high, but it is the third-highest reading in the 25-year history of the survey.

ASB chief economist Nick Tuffley says would-be home buyers are understandably frustrated.

Perceptions of whether it’s a good time to buy a house crumbled further in the three months to April. A net 21% of surveyed respondents believe it’s a bad time to buy a house.

“That’s close to as gloomy as it gets for this index and completes a full reversal of the positive buyer sentiment prevailing this time last year,” says Tuffley.

Meanwhile, the public’s interest rate expectations are on the march.

“Survey respondents have read the tea leaves and concluded the country can’t have a housing boom, an economic recovery, and a burst of inflation all with interest rates staying at record lows forever.

“The vast majority of respondents now expect interest rates to either increase (30%) or stay the same (41%). Those expecting further falls (10%) are suddenly a clear minority.”

Tuffley says overall, it appears that pressure is coming out of the housing market only gradually, and still-lofty housing confidence gels with this vibe.

“The Government and Reserve Bank are mounting a stern challenge, but the question is whether enough has been done. ‘Give it time’ would be our response.

“Rising supply and a turning in the mortgage rate cycle will eventually cool the market’s jets. Housing headline fatigue is real, but the debate looks set to rumble on.”

Mortgage strategies

For investors who want certainty with their mortgages as they work out what the scrapping of tax deductibility means for their cashflow, the ASB says fixing at the current low short-term rates, then subsequently rolling fixed terms will be the cheapest option over five years.

The bank’s quarterly Home Loan Rate Report points out borrowers can obtain certainty and a significantly lower rate by fixing their mortgages.

The report says while mortgage rates could dip lower because of anything from Reserve Bank actions through to renewed threats to the economic outlook, there is a significant cost to floating rates – about 2% above what can be fixed at now – while investors try to pick the bottom in rates.

There are also risks rates could move higher sooner than expected and investors should pick a strategy to suit their risk appetite, flexibility needs, as well as the goal of minimising interest rate costs.

The bank says borrowers could also consider splitting the mortgage into different terms to better suit their preferences for interest rate certainty versus retaining flexibility.

Borrowers should be prudent and plan to deal with higher interest rate costs, rather than budget on rates remaining this low indefinitely.

For those who want interest rate certainty, the cost of fixing for longer terms is low compared to the past, with existing rates around 3%.

ASB now expects the Reserve Bank to start raising the 0.25% official cash rate (OCR) by May 2022.

However, the bank does not expect the OCR to move up significantly, peaking at 1.25% in late 2023/early 2024, meaning rates are likely to “settle” at still-historically low levels.

The bank expects the Reserve Bank will want mortgage rates and other borrowing costs in the economy to remain low over the year ahead.

ASB economists think the improving economy means that the OCR will not remain at record lows indefinitely.

With the economy going well, a question people are now asking is when will the Reserve Bank start to unwind the huge amount of stimulus it has put in place?

And to cut to the chase, borrowers are asking when will mortgage rates rise, and by how much?

What’s driving mortgage rates?

Mortgage interest rates are influenced by a range of factors, including the Reserve Bank’s OCR setting, developments in domestic and global fixed-interest markets, and other influences on bank funding costs, says the report.

Last year the Reserve Bank added a couple of new things to the toolbox. Firstly “quantitative easing” was added to the mix of things the bank can do that indirectly impact mortgages.

Basically, quantitative easing means the Reserve Bank is exerting influence on a wider range of interest rates in the economy, by buying bonds and boosting liquidity, in addition to its usual task of setting the official cash rate.

It has aimed to make wholesale interest rates lower than they would otherwise be if there wasn’t a huge and constant buyer in the market.

Although the Reserve Bank is buying government bonds, it impacts retail interest rates, including mortgage rates, as well.

Over the past year fixed mortgage rates and term deposit interest rates dropped significantly.

In December last year the Reserve Bank launched a Funding for Lending Programme (FLP) for banks.

This programme provides another source of funding for banks in addition to the traditional retail, ie savings and term deposits, and wholesale markets.

Funding via this channel is cheaper than term deposit and other wholesale funding, so the facility has the potential to hold down interest rates as it gets drawn on.

However, the facility will only ever account for up to 4-6% of banks’ total funding, which will limit its impact.

How high could interest rates get?

The bank say this depends on a host of factors including OCR settings, inflation, and bank funding costs, many of which are difficult to forecast with a high degree of accuracy.

Based on the ASB economic team’s expectation the OCR will peak 1% higher than current levels (at 1.25%), and assumptions about bank funding costs and inflation forecasts, the economists expect mortgage interest rates will lift to levels 1-1.5% higher than they are now by 2025.

As is often the case, the outlook is far from certain.

Is it worth breaking to reset at a lower rate?

Break costs are an important consideration, and an understandable frustration in a low interest rate environment.

Many people are surprised at the cost of breaking a mortgage. So why are break costs there, and why are they large now?

The simple explanation is because when a mortgage was fixed in the past, the costs of that mortgage was a function of the prevailing interest rates the bank was paying for money at that time, not whatever the costs are today.

In other words, the cost of the underlying funding the bank acquired for the mortgage (fixed in say 2018) remains relevant in calculating the break cost.

With both retail mortgage interest rates and the underlying funding rates falling a long way over recent years, break costs are often significant.

Nonetheless, ASB can calculate the break costs of a mortgage daily to help with these decisions.

There isn’t a shortcut to lower mortgage interest rates without incurring a break cost. But breaking a mortgage and resetting at a lower rate can still be a reasonable strategy for getting interest rate certainty over a longer term at low rates.

There are many moving parts in this equation, so investors should take time to work through the numbers, and the pros and cons, says the bank.

A rule of thumb to have in mind is that generally, the bigger the difference between the current mortgage rates and the rate fixed at in the past, and the longer the term remaining, the bigger the break costs will be.

There will be a term depositor or wholesale investor that doesn’t want to drop the interest rate they locked in around the time the mortgage was fixed, which is the mirror situation: banks must balance the positions of both savers and borrowers.

Identifying the best strategy

Working out what strategy is best is easier said than done given the number of influences impacting on mortgage interest rates, and individual borrower’s differing requirements for flexibility and certainty.

It’s often not as simple as opting for the lowest rate, says the report. 

Historically the mortgage curve has been “tick-shaped”, with one to three-year fixed rates lower than both the variable and five-year rate.

It’s a flat tick now, with all fixed rates below the floating rates (with the exception of the 1.79% ASB Back My Build variable rate).

The lowest rates are at the one-year term at the time of writing. These low rates are about 2% below the floating rates, at or near record lows, and under 2.3%.

At the other end of the curve, three to five-year rates are between 3 and 3.5%, and over 1% below floating rates.

On top of trying to minimise interest payments, a good mortgage strategy also needs to take into account personal cash flows, tolerance for uncertainty, and ability to deal with changes in future mortgage payments as interest rates change.