Recent OCR Drop and Bank Reactions

I find it reassuring that something in the world has occurred as per the predictions… On Wednesday 19th Feb the Reserve Bank dropped the OCR by 0.5% (to a rate of 3.75%). Most banks dropped their floating rates by 0.5% on the same day. All this is pretty much in line with predictions. Wheww.

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Fixed Home Loan Rates

Fixed Home Loan rates had been nudging down prior to the 19th and at the time of writing (20th Feb) there have been some small, fixed rate drops. ANZ were more aggressive by advertising a 2-year discounted rate at 4.99%. Perhaps trying to outdo Westpac who last week dropped their 3-year rate to 4.99% - only to remove that offer this week. Go figure! I have heard rumours that Westpac may be matching the 2-year rate at ANZ however, so stay tuned for a battle of the banks (perhaps I am being a little optimistic here??)

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What to Do with Your Home Loan

So, what to do with one's Home Loan when it rolls off its fixed rate…

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Predictions for Future Rates

Let me bring out my crystal ball and give it a bit of a shine… The Reserve Bank has indicated further drops are possible. An OCR of about 3% is about “neutral” they tell us, so if there are “no external shocks to the economy” it seems the Reserve Bank will remain happy that inflation is under control so will likely reduce the OCR to around this level through the course of the year. If this occurs, floating and short-term fixed rates should continue to nudge down.

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Global Influences on Interest Rates

And then on a global level: Surely, we have all learnt by now to expect the unexpected. It is almost impossible to pick what will happen in the US and wider afield, and these global events have a big influence on international economies and inflation and so our longer-term interest rates. Who knows what will happen with the longer-term (3-5 year) home Loan rates.

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Long-Term Rate Predictions

If these rates head into the 4%-5% range these are pretty attractive long-term averages. It would take a pretty big event (think Covid Mark 2) to get them back to those 2-3% levels we saw in 2020. In all but the most extreme conditions we can rule these out, so best to put that possibility aside.

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Strategies for Fixed Rates

So, what does my crystal ball say you should do with your fixed rates? I think you should do one of three things (never one to commit you may say). Which one is right for you will depend. There is a case to be made for all of them. I know that is not so helpful, but hear me out:

1. There is an argument for fixing short-and to “ride the 6-month rate down” one or two more times. You are paying a premium for that short term, so you would need to expect these rates to fall away pretty quickly in a relatively short time period to “win” from this strategy.
2. Fix for 2-3 years to give some certainty (particularly if there is a big margin between the 2–3-year rate and the 6m-1 year rate). Under this strategy, I suggest you would save some money while the interest rate is lower as who knows where things will be when your fixed rate rolls off. Fingers crossed they will be lower than now (but if not, don’t forget you have saved in the next few months to offset this).
3. Split your loan up to hedge your risk. You won’t be as good off or as bad off when rates change. This can be a good option if you are concerned about big fluctuations in loan payments.

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Final Thoughts

For many (or dare I say most) when you come to refix your loan repayments will be lower than they are now. This is a critical time to have a big impact on your home loan. I’ll talk more about this next month, but make sure you have thought this through before you refix. Do you keep the payments the same and take years off your loan or… do you reduce the payments and take some pressure off your cash flow… or do you maximise the use of floating loans to give you more flexibility… or do you take that extra money and invest in other asset classes (just to add some extra complexity in here).

I don’t have a crystal ball so may not always pick Interest Rate movements - however, I, along with all the advisers at Velocity can work through a strategy with you given the certainties and uncertainties you face.

Brendon.

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Brendon Ojala (FSP119244) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see our disclosure statement on our website.

About Brendon:

Hi, I'm Brendon, one of the owners and advisers at Velocity Financial. I have been giving advice on mortgages and insurances at Velocity for around 15 years, and it is great to be able to work with people to achieve their financial goals. Prior to giving money advice, I worked as a youth worker and managed teams for a not-for-profit organisation. I live with my wife and one of my sons (the other one only stays when he needs food) in Berhampore, and if I'm not talking revolving credit accounts, I can be found running the trails of Wellington.

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