What do low mortgage rates mean?

June 1, 2020

Recently, banks in New Zealand have cut mortgage rates in response to the reserve bank and NZ governments drive to increase spending. Mortgage rates, low or high, are generally in line with the Official Cash Rate (OCR). The OCR has been set to a record low 0.25% by the reserve bank and we have been told this rate will not go up for at least 12 months. Although borrowers and banks can rest easy knowing this rate will not go up, some are speculating that it could drop even further and even go below 0%. 

As a direct result, mortgage rates have been significantly reduced with some banks offering special rates as low as 2.69%. This is a stark contrast to rates of about 5.5% only 12 months ago

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What do low mortgage rates mean?

Ultimately with low mortgage rates, borrowers can access money more easily. With lower interest rates the amount that needs to be paid back on the loan each month decreases and therefore a borrower can safely service a larger loan. This, along with the fact that the amount of interest paid on the loan is less over the term of the loan is reduced, means that borrowers can take out larger loans.

For first home buyers and those with low equity positions, this might mean they are now eligible for a loan where as previously they were previously not. This results in an increase in spending to help the New Zealand economy get back on its feet and could also mean that the hosing market becomes somewhat protected from a downturn

Do low mortgage rates affect if I should look to sell or buy a property in 2020?

Fundamentally the reduction in mortgage interest rates is designed to encourage borrowers to take out loans. The reserve bank has decided that NZ needs more spending and is incentivising us to do so. The decision on whether to buy or sell in any climate, but especially the current one is a big decision. Getting independent financial advice is encouraged. 

If you intend to buy and sell in the same market, as long as the market isn’t too fluid, there shouldn’t be a big difference in how you would make decisions under normal circumstances. Trying to time the market or buy in the dip can lead to both missing out on the timing and missing out on the property you want. On the other hand buying at the right time could mean a big difference in the home you can afford.

How do I get the best mortgage rate possible?

Firstly, talk to your bank or mortgage broker. Chat to them about what they think the future might hold. The future is still quite uncertain, some think that we might see further reductions in rates, but no one truly knows.

Some common advice you might receive is to split your mortgage. Splitting your mortgage into two or more chunks can mitigate any impact due to rate changes and the possibility you didn’t select the optimal loan option. Locking in a chunk on the 1 year rate and another chunk on the 2 year rate can mean that you hit both the higher and lower rates being offered. 

Another method to getting the best rate possible is to either negotiate with banks by getting multiple quotes, or by using a mortgage broker. The advertised rate is most often not the best rate possible. A mortgage broker will have a good idea of what the best rates at any point in time are and can negotiate based on what they have seen others offer. Negotiating with banks yourself can also be effective, but will take time and some skill.

For many people, selecting what mortgage rate to go on is really a pay off between getting the best rate, and having some certainty around repayments. With rates the way they are right now, not many borrowers are choosing to go onto a floating rate. Some are selecting the short term cheapest option, while others are locking in the 2 or 3 year rate for a sense of certainty. Stress can be far more costly for some than missing out on a few percentage points on a rate. 

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What does refinancing a mortgage mean?

Refinancing is breaking one mortgage in order to get another. Often this is to change rates or structures, but can be for a variety of reasons.

One of the most common questions about mortgages in the last month is around breaking mortgages and the fees involved. Depending on the situation, some borrowers may end up saving a sizable amount by getting out of the old rate and into the current record low rates. However, we have been seeing that this is quite rare. 

Breaking a mortgage will often come with a fee that is about the same as the interest savings you will make.

To check if it would be profitable to refinance, you could begin with  the interest.co.nz mortgage break fee calculator. This should only be used as a guide, calling your bank or broker is the advised method to figuring out your situation and getting the real numbers.

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