I am sure you will have noticed the sub-3% rates that are now being advertised. Most banks are advertising 2.99% rates for 1-year and 2-year terms with some bespoke lenders even slightly cheaper. At the time of writing, a major bank has just dropped their 1-year “special discounted rate” to 2.79%. These are of course highly appealing, so should we be breaking our current loans?

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To break or not to break?

We are getting lots of enquiries from clients who are considering breaking their higher fixed loans to take advantage of these rates. In simple terms, this will be a neutral position where the cost of the break fee will equal the lower rates over the period of the loan. We can take a look at the figures for you, but don’t be surprised if the figures don’t make it worthwhile to break a current loan.  

As a starting place, punch in your loan details to this calculator for an estimate of what your break cost will be and what you could save on a lower rate: https://www.interest.co.nz/calculators/mortgage-break-fee-estimator

What the Reserve Bank have said

In short, the governor of the Reserve Bank “encouraged” the banks to lower their rates further. He is looking at the wholesale cash rate (one place banks get their money) and sees this dropping and wants the banks to pass on the lower cost of acquiring funds.

There is discussion that the Official Cash Rate will drop even lower and a “negative OCR” has been mentioned. Do note this doesn’t mean that banks will pay you to have a home loan. There is a margin (around 2%) between what the banks can secure funding at to what they pass on to their customers.

How long to fix for?

If the economists and the Reserve Bank are right, why would you fix for longer than a year? If rates remain low, you can choose to lock in at another great rate in a year’s time.

You may choose to float for a few months to see if rates go lower before committing. During that floating period, you will be paying more, so that would need to be weighed up.

If your budget is tight you may want some more certainty. Having a 2-year loan at 2.99% isn’t bad. Or even 3 years at say 3.25%. You may be willing to forego the very cheapest rate for the certainty—think of it as an insurance premium.

How to take advantage of these rates

Whatever your strategy—assuming your income has not been affected by Covid-19 (if it has, that is a completely different conversation we need to have)—surely there will be no better time as now to work on reducing the size of your loan.  For example, the difference between a 4% interest and a 2.99% interest rate on a $500k loan is over $5k per year. For no extra cost, you could be paying another $5k off your loan. And, what is possibly more exciting (if that is possible when discussing mortgages), if that $5k savings continues, your loan will be paid off seven years earlier than otherwise.

As I always say, everyone’s strategy will be different, as everyone’s situation is different. Do talk to us so we can fine tune your mortgage strategy with you in mind.

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Brendon Ojala is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.