(Time of writing: April 17th)

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Market Overview

Since my last update, it seems the world has gone a little mad. Someone hit the “on button” on the blender, and a fairly good shake-up is going on. This has made the New Zealand Interest Rate market look very tame in comparison.

On April 8th, the Reserve Bank dropped the Official Cash Rate (OCR) by 0.25% as expected. In the last week, banks have “nudged down” their short-term fixed rates, so at the time of writing, most banks are offering 1-year, 18-month, and 2-year rates all just under 5%.

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Key Drivers of Interest Rates - Up or Down?

It seems to me there are two key drivers of interest rates through the rest of the year: the risk of continued or expanded economic recession (which would move Home Loan rates down) or the risk of inflation (due to tariffs, etc.) that could move interest rates up. The mainstream thinking right now is that the downside risk (i.e., recession) is likely to have a bigger impact than the inflation risk.

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My Current Client Conversations

At the time of writing, most of my conversations with clients are about choosing between a 1-year Fixed rate and a 2-year rate. As a side note, it is amazing the psychological impact of a 4.99% vs. a 5.05% offering—when the actual difference to your payments is VERY small.

There is increasing talk in the market that fixing slightly longer (particularly if you can get a 3-year rate at 5%) is a pretty good option. For some, that certainty may well be the best option. However, personally, I think the shorter rates will continue to nudge down, so there is also a defendable rationale for fixing for the 1 or 2-year option. (I covered that last month—and I don’t think too much has changed.)

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Deciding on a Fixed Rate

To be honest, I don’t think whether you fix for 1, 2, or 3 years is the critical decision. Unless there are large unexpected movements in rates over the next few years, whatever you decide to do, you will end up at pretty much the same place. In saying that, let’s work through the options based on our best current information, and hopefully, our future assumptions prove to be correct so you have minimized your interest rate costs.

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The Critical Piece

Stay tuned, dear reader, as I think the following IS the critical piece: The vast majority of people will be fixing their Home Loans at a lower rate through 2025 than they are currently on. Many of my clients are coming off rates in the high 6%’s and will fix in the low 5%’s. A drop of 1.5% feels about the average decrease for those I work with. Let’s say you had a $600k loan. A 1.5% drop in interest is going to save you $134/week. The key decision is what you do with that extra money.

1. If your budget is tight—or even going backwards (i.e., you are spending more than you are earning), then you will have a sigh of relief and pocket the extra money so you can pay your bills. That isn’t the greatest long-term outcome, but it is completely understandable and necessary for many in the current economic environment.
2. You might have some projects/maintenance that is outstanding, so you might want to save the extra funds for this. I would suggest it is a better approach to save this money now, rather than be too aggressive with your debt payments and then need to get a top-up for these projects down the line.
3. If you can keep the payments the same, this has a really significant impact over the long run. If you keep the payments the same, you would take a 30-year loan and it would become a 21.5-year loan. You will become debt-free 8.5 years earlier and save yourself $190,648 in interest.
4. Disclaimer: That sounds pretty good—and it is. However, what you won’t read in most commentaries is that to achieve these savings, the assumption is that you are paying $134/week more than the minimum 30-year repayments. As interest rates and minimum payments move, you need to stay $134/week over that minimum. That is easy when rates keep dropping, but if/when rates increase again, you need to keep those extra payments up.

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Calculations for Fact-Checking

Here are my calculations for you to fact-check:

• $600k at 6.75% over 30 years is $895/week.
• $600k at 5.25% over 30 years is $761/week, saving $134/week with total interest payments of $591,935 over the course of the loan.
• $600k at 5.25% at $895/week is 21.5 years with total interest payments of $401,287.
• That means an interest saving of $190,648.

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Get the Right Advice

So, at fixed rate review time, yes, let’s discuss what period to fix for, but let’s not skip the conversation about what to do with the change in payments.

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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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