With interest rates changing so much and trending downwards, you need to rethink what you’re doing with your home loan.
It’s more important than ever to have a strategy so that you can take advantage of interest rates as they go lower, but also to protect yourself in case there’s a reversal and they start increasing again.
Understand What’s Driving Lower Interest Rates
First and foremost, we need to know why interest rates are going lower. In many respects, it’s quite simple. The country held rates too low for too long due to COVID, and Kiwis got used to spending money like there was no tomorrow. The net effect was inflation spiked, and therefore the Reserve Bank had to go hard to get that back in line with where it should be.
That saw interest rates increase at a speed that we’ve never seen before in New Zealand, and that made a lot of Kiwis hurt financially. The Reserve Bank will argue that they did the right thing and have managed to get inflation back under control, but the effect it’s had on people with mortgages and the wider economy has been huge, and so we’ve seen the country in recession now for a good period of time.
So what the Reserve Bank is doing is easing the interest rates back to try to stimulate the economy again, and so we’re seeing home loan rates drop. But there will be a point when the economy starts to pick up, and therefore the reduction in interest rates will halt.
The problem is nobody really knows when that is going to happen, because the economy has taken a really big hit. But I think it’s fair to say that interest rates could drop another, say, 1% over the next 12 months, but it’s unlikely that they will go much lower than that.
What we’re talking about here is getting to the stage where interest rates are going to sit at just under 5%, but I think it’s highly unlikely they will go down to under 4% again in the current cycle.
Why Refixing Online Is Dangerous
So often the banks are out there trying to get people to refix their mortgages online, and that’s not the right strategy for you.
They offer rates online, the reason they offer rates online is to make it super easy for somebody to just click a button and fix their rate. However, super easy does not mean it’s super good.
Also what you need to be looking at is your overall financial position, not just your mortgage.
You should be looking at what interest rates are being offered by the bank that you’re with and comparing to what the market is doing, what other banks are doing. You should also be checking if you are with the right bank at all.
So there’s a few questions that you should ask:
- Do I have debt that is more expensive than it needs to be, and should I look at incorporating that into my mortgage?
- Do I have the opportunity to borrow some extra money to invest?
- Do I have my mortgage with the right bank?
- Does it have the features that a good mortgage should have, with the ability to pay off the mortgage faster when I can, or to slow down the mortgage payments if I need to?
- Is my mortgage all in just one loan, and is that too risky?
While these might not seem like issues you need to deal with now, should your circumstances change you can very quickly find yourself having a world of stress trying to get your bank to help.
When you have a mortgage, you have a large financial commitment, and so it’s worth spending a little bit of time to make sure that you have it right.
You don’t want to be in a situation where you’ve not reviewed your mortgage and find yourself stuck.
When To Refix Your Home Loans
Most banks will give you the opportunity to refix your mortgage either 90 or 60 days before it comes off fixed.
You need to consider when is the best time to fix your loans. Generally speaking, if interest rates are declining like they currently are then you want to leave it as late as possible. But if interest rates are increasing, which happens at times, then you want to refix as early as possible.
You want to do your own research and understand what is happening in the market. We are implementing a new system to ensure that our clients get emailed 90 days before their fixed rate expires. This email will also have a link to our latest market report.
The market report is not your typical economic report full of complex data and terminology that the average Kiwi does not understand, but instead is written in simplistic language that gives you a good understanding of what is happening.
While refixes are something that mortgage advisors do every week, we understand that for many people it is something that you only do once a year. Therefore, a little reminder can go a long way to ensuring that things do not get forgotten. You will also be emailed a quick checklist to consider before you do any refix of a home loan.
We ask that you dedicate a little bit of time to review where you’re at. Again, we do stress that a home loan is a large financial commitment. The difference between getting it right and getting it wrong can have huge consequences in the future.
What’s The Best Approach?
The key is to have a strategy that works for you.
As mortgage advisers we have seen people struggle with refixing loans and always chasing the best deal rather than working with a plan. We’ve seen people that get stuck on higher interest rates and others miss out on the lower interest rates, and it’s often because they have just done what the bank has suggested.
We encourage you to forget about loyalty to a bank. The thought process instead should be: what is going to be the best option for you?
Be careful about just chasing the lowest interest rate too. Obviously, it seems like a good idea to get the lowest interest rate but what is the lowest interest rate today may not be the lowest interest rate tomorrow. The most important thing is to make sure that you have competitive interest rates all of the time rather than a low interest rate one day.
You need to take a long-term approach with a mortgage. It’s easy to make decisions based on what your situation is right now, but you need to understand that a mortgage is a long-term financial commitment. Over the years ahead, your situation will change for the better and for the worse.
You don’t want to be relying on the bank to make financial decisions for you in the future. You need to be in a situation where you have that control and can work with your advisor to do what’s best for you, especially if things go wrong.
Finally, think beyond just a mortgage.
A mortgage is a fairly efficient way to borrow money. While none of us want to end up going into retirement with a mortgage on our home, if it’s set up correctly it can give you the flexibility to create other investments that will increase your wealth over time.
A lot of people will use their home loan to invest in a second property, but you can also use your home loan to invest in a range of other assets as well. Of course, with any investment, you need to be careful. But it is definitely something you need to consider as a way to move forward financially.
