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The last Reserve Bank interest rate announcement in May unsurprisingly left the OCR (Official Cash Rate) unchanged. Although the OCR rate isn’t the only factor that determines home loan rates, it certainly is a part of it.
What was somewhat surprising was the narrative that accompanied the announcement. The RBNZ has now predicted that the OCR is likely to remain where it is until at least August next year. Parts of the inflation figure seem to be a bit stickier than earlier predicted. Special mention was made of the impact of rising insurance costs, rates, and rents. (This probably comes as no surprise to anyone, but on the positive side of inflation news, go fruit and veg! Unless you grow fruit and veg, in which case, oh no, there's a market glut of fruit and veg.)
Since this announcement, I have been watching and listening, and it seems the markets may still be predicting home loan rates to start dropping later this year, with the bulk of economists expecting rates to begin falling early next year
The bad news is that recent economic data and announcements may have delayed any potential decreases in interest rates. If you fixed your rate for six months a few months ago, you might not see any decrease in your rates when it's time to refix.
But the good news is that rates haven't increased! Unless there is a significant inflationary shock to the New Zealand and global economy (think a combination of Covid, Ebola, and oil shocks), it is unlikely that rates will rise.
We are holding our collective breath for a little relief when rates start to drop.
Unless your circumstances are slightly unique, when it's time to refix your home loan, you are likely to be offered rates around:
6.95% for 6 months
6.85% for 1 year
6.65% for 18 months
6.60% for 2 years (and lower for 3-5 years)
Given this information, what should you do when refixing your home loan?
I talk to clients daily about fixing their home loans. For the vast majority, there is a strong case for fixing for 6, 12, or now maybe 18 months.
Even though the longer rates are lower, I am struggling to find a good justification for these rates for most of my clients.
However, let me offer a couple of scenarios in the interest of balance.
If the budget is so tight that an extra $20-$30 a week would be the difference between financial survival or not, and there is a definite improvement in income levels expected in a couple of years (or reduced childcare costs, etc.), then it might be wise to fix for 2-3 years. Because the 3–5-year rates are lower, it will cost you more in the short term to take a short-term rate. A calculation and some estimates (guesswork?) need to be made to determine when and how fast rates will need to drop to be better off taking a series of short-term rates.
My math, based on what most economists are predicting, would suggest shorter is best.
I have read opinions from those who disagree and don’t think rates will fall so quickly—thus, they argue it is better to fix for longer. We are all basing our recommendations on the likelihood of future events occurring—what could possibly go wrong! We make the best guesses based on the best information we have at the time of the decision.
My last and only semi-related point I want to make is that in times of economic uncertainty, when deciding on your home loan strategy, cash flow is king. If you have a surplus in your family budget, for most people, you'll want to maintain access to it. Sure, paying down debt quicker if you can is certainly the best long-term financial decision, but in times of uncertainty, be really sure you can access it again, or be REALLY sure you will never need this money. There are no guarantees that the banks will lend you more down the track should your car break down or your roof start to leak.
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.
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.