Our topic today is the interest rate that many people worry about at the moment. It has been a little while since our last discussion. Now, there are some interesting movements in the interest rates market. Interest rates have risen rapidly this year. In August, they started reducing interest rates by one-year and two-year terms. Following the recent OCR announcements, interest rates have not changed much. As of mid-September, the fixed interest rate has again begun to rise. Most people are confused about movements and unsure what to do with their situation. Let's discuss this further.

It is important to note that the content in this article is intended for general informational purposes only. There is no personalised financial advice since no consideration is given to the individual's particular financial situation or goals. Therefore, before taking action, please seek advice from your bank or financial adviser.

Floating Rates

That's inevitable because inflation is still a big problem now. Not only in New Zealand but also worldwide. Fortunately, economists predict inflation will not be as severe as initially predicted, but it can persist for more extended periods. That is why OCR must hack to reduce demand and lower inflation.

Fixed interest

Most of us choose a fixed interest for our loans, which is a major concern today. We believe interest rates will continue to rise, but not as rapidly as before. We mentioned earlier in the article that banks' one-year fixed rates had decreased slightly in August, which surprised many of us since we only expect interest rates to increase. Obviously, banks are trying to get more business.

Despite this, the banks' profits are already very tight from the perspective of their borrowing costs and interest income. Banks have to borrow money to lend to us. As well as borrowing domestically, they also borrow abroad. Due to the current global inflation increase and economic downturn, the US federal reserve recently increased the interest rate by 0.75%. That means the cost of borrowing from offshore has increased. To maintain their margins, banks have to pass on the increase to us.

Therefore, further reductions are unlikely to occur. There will likely be only a slight reduction if this occurs. During the next 12 months, we expect interest rates to continue rising, but at a slower rate than previously. It is difficult for even economists to accurately predict the trend in interest rates due to inflation which is mainly caused by economic and social recovery from COVID-19, and wars. Rather than searching for a definitive answer, we should focus on reducing the risk and pressure to repay the loan.

Refix

The one-year term is the best option among all fixed terms for now. But if you have a large loan amount or worry about the certainty, especially expect your cash flow to reduce or fluctuate, it is better to take a balanced approach which means we split our loans into more than one tranche. You can lock part of the loan for one year to obtain the lowest interest rate, but you should also consider locking for a longer term, such as 18 months or two years. There won't be much difference since one year is also increasing. At the end of 12 months, the weight to the average may be very similar to two-year or 18 months rates. Taking a balanced approach will give you more peace and certainty.

If your loan is on interest only and the term and it will expire in the next 12 months, we recommend you contact your bank or financial adviser early to discuss the next step. You will expect to notice that the new interest rates are more than doubled, and if you have to start paying principal and interest, the new repayment can increase significantly. If you want to seek an interest-only extension, you have to go through full application.  Due to high testing rates and restricted lending policies, you may find it difficult to get approval from your existing bank. It is important you let your adviser know early so that we can help you come up with a plan and prepare for it in advance.

If you are paying principal and interest, you may want to consider paying the minimum if possible. Having some surplus cash in hand will enable you to deal with the emergency or cover cashflow shortfall if necessary. If you have savings, you can make a lump sum payment at the end of the fixed term. It's better than increasing the regular repayments, since if anything happens, you may not have savings to cover it. Remember, cash is the king. Keep some aside for emergencies.

To make it even better, you can consider having a revolving or offset facility rather than making lump sum payments. There are many advantages to these special home loan products. On the one hand, it can lower your interest rates as you can offset your loan with your saving. On the other hand, you can use cash when you need it. In contrast, if you don’t use revolving or offset, and make lump sum payments with your saving, once the money is gone, it’s gone. If you need extra, you have to go to your bank to apply a top-up . It is not very convenient, and there is no guarantee that they will approve your top-up request.

Please note that this article is only a general statement and does not constitute professional financial advice. Do not act based on this article. It is best to consult with a mortgage advisor to determine what is the most suitable option for you. In any case, I hope this video is helpful to you. If you have any questions, please do not hesitate to contact us.

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.