Lower and lower, that is the continuing track for New Zealand mortgage rates this year. The current one-year fixed term rate of 2.25% hits the lowest. Will interest rates stay low in 2021? The property market is a bit over-heated now and how likely are interest rates to go up in 2021? It’s around the time of the year that we take an educated guess at what will happen with mortgage rates.

Prefer to watch Connie explain it all in a video? Have a watch below:

NZ Interest rates forecast for 2021

Video Timeline

1. Current home loan interest rates in New Zealand (December 2020 updated) - 00:45

2. Low mortgage rates will be here for 2021 - 01:45

3. Slowing down a hot property market, will this drive mortgage rates to go up in 2021? - 03:59

4. How long should I fix my mortgage for in 2021? - 07:39

1. Current home loan interest rates in New Zealand (December 2020 updated)

One-year fixed term rate: It’s the lowest one among all fixed-term rates. Many homeowners choose to fix their mortgage for one year not only because it’s the lowest one at the moment, but more importantly, they also predict that the interest rates are going to drop again in 2021.

18-month fixed term rate: It’s the second-lowest rate, just five basis points higher than the one-year rate. Another good option to fix for when the certainty is much important to you.

6-month fixed term rate: It’s above 3%, and relative a bit expensive – too close to the floating rates. There’s no real value going to the 6-month rate unless for a specific reason, such as selling your property soon.

2. NZ interest rates forecast for 2021 – Will interest rates stay low or go up in 2021?

Low mortgage rates will be here for 2021

Some economists predicted the interest rates might fall into negative territory next year, and New Zealand banks have been asked to have systems ready to accommodate. We haven’t experienced that before. If happening next year, they’ll need to get everything ready, the policy, process, system, and rates. However, some bank economists say negative interest rates won’t be there because New Zealand economy is recovering well. They expect the interest rates and OCR to drop further but won’t go below zero.

In the meanwhile, the Funding for Lending Program (FLP) proposed by the New Zealand Reserve Bank will push mortgage rates to drop further in 2021. Here’s how it works. The FLP lowers bank funding costs by lending directly to banks at much lower rates so that the banks can pass on that cheaper rates to home borrowers. Compared with leveraging OCR to lower the rates, the rates that FLP allows banks to lend at are not linked to the term deposit rates. That means the move to FLP won’t see deposit rates for bank customers drop down, considering the depositors are also one of the funding sources for banks.

In short, we believe it is very likely that the mortgage rates will stay low or even lower in 2021 than they are now.

Slowing down a hot property market, will this drive mortgage rates to go up in 2021?

Whilst low interest rates are a major catalyst for increasing house prices, no doubt you’ve heard about the Labour government are pushing reserve bank to do something to cool down the overheated market. To slow things down, will Reserve Bank push the mortgage rates to go up next year?

It may seem simple to drop the mortgage rates to slow down the current property market, but the rates are not set just for cooling the housing market. Lower interest rates also help control the inflation rate within the target range, encourage people to spend, stimulate the economy to recover. Tony Alexander, an ex-chief economist from BNZ, said the reserve bank might use the following two tools, rather than increasing mortgage rates, to control the housing market.

LVR (loan-to-value ratio) restrictions are coming back to 70%

On 1^st May 2020, the New Zealand Reserve Bank(RBNZ) has removed mortgage loan-to-value ratio (LVR) restriction for property investment loans, as part of a range of economic stimulus measures designed to combat the recessionary effects of the COVID-19 pandemic earlier this year. The LVR restrictions were originally intended to be removed until May 2021, but the RBNZ just announced to bring that forward and reintroduce in March 2021.

In fact, some New Zealand banks are already reacting ahead of the RBNZ’s official effective date of 70% LVR restrictions on investment property loan. For example, on 11th November ASB announced to move immediately to increase the minimum deposit required for investment property loan from 20 percent to 30 percent. ANZ & BNZ said it would bring in 30 percent deposit rate from 7th December. Alex predicted there might be a chance that the minimum deposit for investors could be raised to as much as 40%.

The return of LVR restrictions may slow down a part of the market heat, resulting in some hurdles for property investors.

Debt-to-income ratio rules to be introduced, probably

Second, the Reserve Bank may request to introduce Debt to Income ratio rules which restrict how much home loan a bank can lend to a borrower based on the total income. For example, if the debt to income rule becomes effective and the ratio is six times, say your annual income is $100k, then the maximum loan amount that your bank will be allowed to lend you is $600k.

Although the rules haven’t been introduced yet, some banks already use this weapon. ASB, as an example, requests six times of debt to income ratio as an additional restriction when investors applying for 80% of LVR.

Having these two tools is more likely to help slow down and control the housing market down the track. So it is highly likely that the Reserve Bank won’t raise the mortgage rates in 2021 just for the sake of cooling the housing market. 

3. How long should I fix my mortgage for in 2021? 

If you have or about to come off a fixed interest rate, then the one-year fixed interest rate is a good option. Given that the trend for interest rates is a downward one, and no one knows exactly how quickly things will keep going down, you should be looking to keep the time frame of fixed rate short. Locking your mortgage for one year will give you the ability to pick up on a rate that may fall.

If you need certainty, then consider fixing a portion of your home loan for a longer period. In some cases that may potentially cause your income dropping or outgoing going up, such as you’ll have a new-born soon, yourself or the other half is going to stay at home to look after the little one, or you’ll start a new business soon, we often advise to split your loan into a couple of chunks. By this way, your loan will come off fixed rate at different times and leave room for you to make adjustment if necessary. 

Prosperity Finance – here to help

If you would like to get more tailored advice, please feel free to get in touch. We are happy to review your situation and let you know how we can help. Call us at 09 930 8999 for a chat with one of our mortgage advisors. 

More Articles:

Loan to value ratio (LVR) restrictions for investment property return to 70%

NZ housing market forecast 2021: Will house prices keep increasing?

Using equity to buy an investment property: what might delay your loan pre-approval?

How do New Zealand banks determine the value of your house for a mortgage?

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.