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Before I give you some words of wisdom about what to do with your fixed-rate mortgage that is about to roll off (spoiler alert: it's pretty much the same thing I have said for the last 3 months), let’s talk a little about the factors that impact the rate you will be offered by your bank.
Banks "price" the money they lend pretty much like any goods or service provider. They work out the cost to them to buy the money and then put on a profit margin, and that is what they sell to us.
Often it is a case of “here is the new rate, suck it up” without any explanation of why. Banks really should offer an explanation of how/why they price their lending but failing that, let’s look at the key factors.
Some of the specific factors that impact Home Loan rates are as follows:
(As set by the Reserve Bank) impacts the cost of securing money for the banks. This is particularly true of the floating rate and short-term fixed rate. As this goes up, Home Loan rates go up, and vice versa. It is currently sitting at 5.5% and is predicted to stay there for a year. (Of course, as economic conditions change, the Reserve Bank will change this prediction to either stimulate or depress the economy to try to keep inflation in check. Moving the Official Cash Rate is one of the key aims of the Reserve Bank, and to be honest, they only have very few tools at their disposal to achieve this.)
Banks source some of their money in "the markets." If the money they buy here costs them more, they pass this cost on to you and me in the form of higher Home Loan rates. Over the last few months, international wholesale rates have been going up, so the last couple of Home Loan increases have very much been a result of these changes. There is not much that little old NZ can do about this. The latest increase in the interest rate markets seems to have occurred as the markets believe that US inflation might stick around for longer than first thought (hence the US interest rates will stay higher, for longer).
Those with mortgages often forget that if you have money, banks will give you interest for this. This, of course, is another key source of where banks get their money, so they can lend it out again. Of course, the bank deposit rates are impacted by the above 2 points, but I thought they warranted a paragraph of their own. If banks are short of money, they can increase their deposit rates, and more people will deposit money.
Banks are driven by their profit and their market position. If they are losing market share, they will discount their mortgage rates to attract business (they will also offer more "cash contribution" and have even been known to throw in the odd TV or trip to Fiji). It will be interesting to see if any of this goes on over the next few months, as spring is often the time banks seem to launch campaigns to attract new business.
The interest rate you are offered will also be impacted by your personal set of circumstances. If you have a low deposit, then rates won’t be as good as if you have over 20% in deposit/equity. If you have a big Home Loan, you will likely be offered a slightly better rate than if your lending is smaller.
Rates have nudged up a little during the last month, primarily based on point 2 above. Unless these wholesale rates continue their upward trend (that would surprise most), most economists and commentators are picking NZ Home Loan rates won’t increase much at all from here. So, the big question is when will they start to drop? There is quite a lot of uncertainty around this. Some are saying that the NZ economy looks pretty bad. That, along with issues in China, may lead to drops in the first half of next year. Others are saying NZ inflation looks “sticky,” so the Reserve Bank may even need to increase the OCR again, and rates won’t start dropping until 2025. At the time of writing, the mainstream view seems to be rates will start dropping from mid-2024. If that is true, then fixing for 1 year, 18 months, or 2 years still seems to me to be the options. It will only be in hindsight that the “best option” becomes evident.
If you want to read my thoughts on “hedging your interest rate risk,” flick through some of my prior Fixed vs Floating blogs. This is a risk management strategy I refer to often. Even better, make a time to talk over how this works with one of our team. They will explain the concept and if it is right for you.
And as always, before deciding what to do, please have a quick check-in with your adviser. I know it is clichéd, but it is true that everyone’s situation is different, so the right strategy for one is not necessarily right for all.
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.