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When it comes to refixing home loans, it's wise to stay alert to the Reserve Bank's cues. Rumor has it, a cut in the OCR might be on the horizon, suggesting it could be smart to hold off on fixing home loan rates just yet. Exercising a bit of patience could well pay off with potential savings down the line.
At time of writing (15th July), if you have 20% equity/deposit in your home, you can expect to be offered fixed Home Loan rates by the major banks of around:
6.95% for 6 months
6.85% for 1 year
6.65% for 2 years
6.39% for 3-5 years
On Wednesday 10th July the Reserve Bank announced the Official Cash Rate (OCR) wouldn’t change from 5.5% (the 8th time in a row they said this)
A quick reminder that their last prediction (based on the data they had to hand -particularly their inflation figures) was that they would move the OCR in the middle of next year. (around August 2025)
In a very brief statement on the 10th, the Reserve Bank Governor made mention that inflation was moving in the right direction and recognition that the economy is indeed “struggling”.
Based on this, in a flurry of opinion, the economists are now predicting a change to the OCR in November 2024 (if not earlier). The ‘markets’ reacted immediately to the Reserve Bank comments with Bank Wholesale Rates (the rate the banks “buy” money at) reducing by at least 0.2% across all interest rate periods.
It seems in the face of overwhelming data the Reserve Bank are in the process of changing their mind about when the OCR may move.
When considering this I am reminded of a quote attributed to John Maynard Keynes (the founder of modern macroeconomics) He is accredited with saying “When the facts change, I change my mind. What do you do?”
It seems the facts have changed in these 6 weeks and so the Reserve Bank may well change their (in fairness the Reserve Bank haven’t changed their mind yet, but the predictions are becoming overwhelming so watch this space)
I have not read of anyone who is now predicting increases in interest rates, so unless there is some “Black Swan event” (please excuse the economic jargon -but think “Covid like event”) it is now just a matter of when rate reductions will begin.
Armed with the above information, as financial advisers we are finding ourselves increasingly advising our clients to hold off fixing rates for as long as practical unless rates drop. Rates can be locked somewhere between 6 and 8 weeks prior to a fixed rate roll over (or a loan settlement), but the urgency to get these rates “held” is not there at present.
This is very different to the last few years where we have been advising clients to “lock rates in” as soon as it is possible in case they “go up again”.
A word of warning: Once you have advised us or the bank you want to proceed with a certain rate, then this is the rate you will have -even if rates drop in the meantime.
A few months ago, when the Reserve Bank announced their prediction to decrease rates in mid-2025, we could see a rationale for fixing one’s Home Loan for as long as 18 months. With the current information in front of us (realising of course that things can change) it would seem fixing for 6 months or 1 year at the outside is a pretty compelling option.
I do have clients who that makes very nervous, and so I understand the rationale of the “hedging strategy”. Splitting your loan between different fixed terms is a very good risk mitigation strategy and will minimise any changes in Home Loan repayments. (do note these changes can reduce any savings as well reduce any increase -you can’t have the ‘upside’ without the ‘down’). With the overwhelming economic data I would argue that even with a hedging strategy one would be choosing a range of rates between 6 months and 2 years (maybe 3 at the outside) with a weighting towards the ‘shorter end’ of the options.
Do have a talk with us when working through your options. We can't predict the future, but having an adviser to ask some questions and test your assumptions as you make key financial decisions, I believe, is a useful thing.
Brendon.
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.
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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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.