As mortgage advisers one of the most common questions that we are asked is “how low will mortgage rates go?”
Whether you are just getting a mortgage, refinancing your mortgage or just have a loan due for refixing then you will want to try and get the lowest mortgage rates being offered.
After all, nobody likes to pay too much and especially when you see that the banks are continuing to announce large profits.
But has the economic environment changed in 2020?
Lot’s Has Changed This Year
We started 2020 with high expectations for New Zealand.
Sure, there was some uncertainty with how the Government had been managing the economy and some talk about tax increases if the Labour Party was to be reelected at the election, but generally the economy was doing quite well and people were out and about spending.
Then COVID-19 arrived and EVERYTHING changed!
What a year it has been … so far.
For almost 4-months the country has been focused on the health response and the economy has taken a back seat as the Government handed out unprecedented levels of financial support to keep businesses afloat and people in jobs.
People with mortgages were offered the “mortgage holiday” which effectively delayed the repayments but increased the mortgage. Not really a “holiday” and the finance minister recently said he was trying not to refer to it as a holiday as this has caused a lot of confusion for many.
But the finance minister was busy and the money being spent here in New Zealand and around the World has been staggering.
And while many people are still focused on the health outcomes, we are now hearing more about the economy with people starting to ask what the plan is now.
Interest Rates Dropping
One thing that many Governments do to stimulate spending is to drop interest rates.
There are a number of ways that this can be done and in New Zealand the Reserve Bank use the Official Cash rate (OCR) to help manage and control interest rates.
As the OCR is dropped, the expectation is that the banks will lower their interest rates too.
This includes what they pay the depositors, but also the mortgage rates that they charge.
Currently the OCR is at an all-time low of 0.25% after being dropped from 1.00% in March.
This has seen the lowest mortgage rates New Zealand has every had but still people want to know how low will mortgage rates go over the remainder of 2020.
While there is some expectation that rates may go lower it has always been a question of where will they bottom out.
The reality is the banks still need to make a margin and they have generally worked on about 2.00% so that would mean even if they could source money at 0.00% then they will need to lend it out at an average of 2.00% to mortgage holders. This week Westpac senior economist Michael Gordon stated in an article on Stuff that he believes mortgage rates will not go much lower.
What Should You Do?
Now everyone’s situation is different and therefore it is hard to have blanket advice for everyone; however we can suggest a few ideas to consider.
So here are five tips that may help you;
- Currently in New Zealand the fixed rates are lower than floating rates and therefore the advice for most people will be you should try to fix the majority of your lending.
- It’s a good idea to split your mortgage into three loans; a small floating amount to give you flexibility and then split the remainder into two or more loans fixed for different periods so they do not come off fixed at the same time.
- If you have a large mortgage you might want to consider fixing a portion for a longer term to give you some certainty.
- Try and leave some on a floating rate and/or select a loan that offers you the ability to increase (and decrease) your repayments even while fixed. Remember that not all bank loans are the same, so speak to one of our advisers if you would like to find out which banks offer the most flexible loans.
- Review your situation and ensure that you consolidate any more expensive debt into the mortgage to get the low interest rates. While we are seeing low mortgage rates, the banks have not really adjusted the interest rates for overdrafts, credit cards and personal loans. That is where the banks make money, and therefore where you can find some huge opportunities to save money.
Mortgage advisers are good people to source information from as they live and breath mortgages every week.
Good adviser are also able to compare what interest rates the different banks are offering to ensure that you get competitive rates, but also can help you select a loan that suits your situation.