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How things have changed in the last month.

After waiting and hoping for months that rates might start to drop, on 14th August, the Reserve Bank decreased the Official Cash Rate (OCR) by 0.25%, from 5.5% to 5.25%. The “markets,” as well as economists and commentators, had been predicting this, so home loan interest rates had started to nudge down for some weeks prior. The decrease is now in full swing, and it seems every day banks are leapfrogging each other with interest rate reduction announcements. To be honest, it is a little hard to keep up with all the changes!

The decrease is now in full swing, and it seems every day banks are leapfrogging each other with interest rate reduction announcements.

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Interest Rates Dropping

As of 20th August, it seems inevitable that interest rates will continue to decline, unless there is another worldwide inflation spike, which cannot be completely ruled out. Please note that the situation may have changed by the time you read this. No one can tell you exactly by how much or when they will reach the bottom, but the Reserve Bank has stated a “neutral” OCR position is around 2.5%. If this is where they are heading, then we can expect decreases of another 2.5-3% to the OCR and similarly to home loan interest rates.

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Crystal Ball Gazing?

Here is a wee summary as well as what the ANZ estimates rates to be in a year's time:

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How to Get the Best Deal

Here are some tips on how to manage your interest rate decisions in the current environment to help you get the best rate you can.

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In a decreasing interest world, hold off fixing for as long as you can (but don’t wait too long)

It makes sense to hold off deciding to fix a loan in a decreasing interest rate environment for obvious reasons. So do that. If you are fixing a rate online (after consultation with your financial adviser, of course!), this will be actioned immediately. Although you can prepare by holding a rate up to 60 days out, you can also do this the day before your fixed rate is due to roll off. However, if you are waiting to restructure (e.g., pay a lump sum off, separate, or combine loan suffixes, etc.), this will require some admin that, in some situations, can take several weeks. So, do not wait too long to start that process.

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Once you have locked a rate, you have locked a rate

‍You need to know that once you have asked your bank (or instructed your adviser) to proceed with a certain rate, you have agreed to take that rate. If rates drop after you have made this decision and you want to change your mind and get the lower rate, then in almost all cases, there will be fees involved if you want to change your mind.

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If you are buying a home and need to decide about structure and what rates to take, it may be in your interest to structure your lending on floating rates and fix in after settlement

‍When you are buying a house, once you have an unconditional offer, you will be offered interest rates by the bank. These are valid for up to 60 days. However, if you get this sorted out and locked in, by the time you settle the loan (up to 2 months later), rates may be lower. You either need to accept this reality OR you can choose a floating rate and settle the loan based on this. As soon as the loan settles, you can select a fixed rate (based on the rates being offered on the day). You will ‘win’ if rates have dropped in the meantime (of course, the risk is that rates haven’t dropped, and who knows, they may even have gone up). In the current environment, this is certainly a strategy to consider.

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Still ‘go short’

‍As you can see from the above interest rate table, there is an increasing difference between the 6-month and 1-year rates. In this video I analyse this problem a little further. If you look at what ANZ is predicting the 1-year rate to be in mid-2025, you will understand the risks of fixing for even 2 years (or longer) despite these rates.

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Get some advice

If you are an existing Velocity client, it won’t cost you anything, and it can help to clarify the options you have. As you can see, there are options and some complexity in a quickly shifting environment. Our job is to help support you to have a good strategy in place that works.

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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 Brendon’s disclosure statement on our website.

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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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Always get professional advice

The information shared in this post is meant to be general guide to support you on your journey. When making important decisions about your finances, we encourage you to seek independent financial advice first, tailored to your unique situation.  As well as talking with a financial adviser, make sure you talk to your lawyer and accountant too – together they'll help you find the best solution for your specific situation. Our knowledgeable financial advisers are here to help. Check out our website for the details about our financial advisory services in our disclosures  https://www.velocityfinancial.co.nz/disclosure-statement.

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