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AUG 14 2019
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Why won’t my mortgage rate drop to the same level as the Official Cash Rate?

Posted by: Connie in Interest Rates

On 7th August 2019, New Zealand’s Reserve Bank (RBNZ) cut the official cash rate (OCR) from 1.5% to 1%.

The OCR of 1% is at a record low for New Zealand. Many economists expected a decrease of 0.25% points and so were surprised by the 0.5% cut delivered last week.


You might be wondering how banks will respond to this change. Will New Zealand mortgage rates go down further in 2019?

Many Prosperity clients have saved a lot by re-fixing their loans and securing a much more competitive interest rate. So, with this latest OCR development, should you now re-fix your loan to a one or two-year fixed term with lower interest rates? In this week’s blog, we discuss all of these questions and how you could respond to the OCR drop.

Why won’t my mortgage rate drop to the same level as the Official Cash Rate?

Video Timeline:
1. How did New Zealand’s major banks react with mortgage cuts? 00:16
2. Are rates for investment property loans the same as home loans? 01:17
3. Will New Zealand mortgage rates go down further in 2019? 02:13
4. How long should I fix my mortgage for in 2019? 03:39


1. How did New Zealand’s major banks react with mortgage cuts?

Many New Zealand banks quickly reacted to the OCR announcement, saying they would reduce their variable home loan rates.

ANZ, ASB, BNZ also announced they would cut their one and two-year fixed term rates. However, Westpac hadn’t made their decision on mortgage rates up until now.

The current one-year fixed term mortgage rate is 3.69% - the lowest in New Zealand interest rate history. The two-year fixed term rates are 3.75%.

It’s worth mentioning that, although some Chinese banks (e.g. Bank of China) offer better home loan rates than NZ’s major banks, they don’t offer cashback to their clients. So, it’s not comparable. 


2. Are rates for investment property loans the same as home loans?

Some New Zealand banks, like BNZ and Westpac for example, charge higher rates for investment loans than residential owner-occupied loans.

BNZ’s investment loan rates are 0.25% or 0.3% higher than their home loan rates; the difference for Westpac, though, is not as big.

Not every borrower is eligible for special mortgage rates. So, when it comes to different loan types, expect that banks will factor in your personal circumstances when they offer you rates.

Lenders use interest rates as a magnet to draw customers in and compete for their business. Whilst interest rates are important, the lowest offers can often mask other pitfalls you need to be aware of. So, we highly recommend you don’t decide to choose a lender solely based on who offers the most attractive interest rates. 


3. Will New Zealand mortgage rates go down further in 2019? 

Some economists predict that the Reserve Bank will decrease the OCR one more time at the end of 2019.

However, in our informed opinion, we don’t think mortgage rates would go down dramatically, even if the OCR did decrease further.


Here are the reasons behind our opinion:

When banks decrease their home loan rates, they must decrease their term deposit interest rates too. However, New Zealand banks can’t decrease their term deposit rates too much, because having enough aside in domestic deposits enables them to lend money. If the deposit rates aren’t attractive, many domestic savers may consider investing their money elsewhere, instead of a bank.

What’s more, RBNZ may require New Zealand banks to hold more capital, which will lead to an increase in lending costs. If the OCR only drops by a little, banks may decide to not pass their additional costs to their customers. As a result, the supposed cut in mortgage rates will be offset by the cost increase. Therefore, banks may decide to only slightly lower their interest rates or make no change at all. 


4. How long should I fix my mortgage for in 2019?

Is it best to re-fix your loan to a one or two-year fixed term with a lower interest rate, or have a longer term? The answer is: it depends.


When should you choose a short-term fixed rate?

If you do not expect your family net income to decrease within the next two years, we highly recommend that you take advantage of the current special rates and fix your mortgage within two years. This will allow you to re-fix your mortgage with potentially better rates, should the interest rates drop further in the near future. Also, if you decide to break your short-term fixed loan, the break costs associated with this are likely to be less than a four or five-year fixed loan.

Fixing your mortgage with the lowest rate is not the best decision for everyone though. In some situations, you might require more certainty and a strategy that minimises the risk of loan repayment increases.

So, when should you choose a medium or long-term fixed rate?

If you plan to have a baby, start a business, change your full-time job to part-time, or undergo any other major life events that may cause your family net income to decrease in the next two years, we highly recommend you fix your mortgage, or at least some of it, with a longer term.

What’s more, if you have a large loan, say, one million for example, you might need to consider fixing some of your loan for a longer term. Fixing your loan for the long-term will help you minimise the risk of future interest rate increases and higher mortgage repayments. This strategy, therefore gives you some time to prepare for future interest rate increases, or for changes in your circumstances or financial situation.


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.


Prosperity Finance - here to help

Prosperity Finance understands the complexities of the OCR and what that means for borrowers. We help you navigate the mortgage process from beginning to end, and empower you to make the best long-term, informed decisions. As professional mortgage brokers, we’re here to help. Whether you’ve already got a mortgage or you’re ready to step onto the property ladder, give us a call today on 09 930 8999.

Other Recommended Blogs:

Should I re-fix my mortgage now or wait for my fixed term to expire?

Should I fix my mortgage to a three-year fixed term to capture lower interest rates of 3.95%?

How much more mortgage can I afford? (Tips to quickly increase your borrowing power by 800k)


Tags:

On 7th August 2019, New Zealand’s Reserve Bank (RBNZ) cut the official cash rate (OCR) from 1.5% to 1%.

The OCR of 1% is at a record low for New Zealand. Many economists expected a decrease of 0.25% points and so were surprised by the 0.5% cut delivered last week.


You might be wondering how banks will respond to this change. Will New Zealand mortgage rates go down further in 2019?

Many Prosperity clients have saved a lot by re-fixing their loans and securing a much more competitive interest rate. So, with this latest OCR development, should you now re-fix your loan to a one or two-year fixed term with lower interest rates? In this week’s blog, we discuss all of these questions and how you could respond to the OCR drop.

Why won’t my mortgage rate drop to the same level as the Official Cash Rate?

Video Timeline:
1. How did New Zealand’s major banks react with mortgage cuts? 00:16
2. Are rates for investment property loans the same as home loans? 01:17
3. Will New Zealand mortgage rates go down further in 2019? 02:13
4. How long should I fix my mortgage for in 2019? 03:39


1. How did New Zealand’s major banks react with mortgage cuts?

Many New Zealand banks quickly reacted to the OCR announcement, saying they would reduce their variable home loan rates.

ANZ, ASB, BNZ also announced they would cut their one and two-year fixed term rates. However, Westpac hadn’t made their decision on mortgage rates up until now.

The current one-year fixed term mortgage rate is 3.69% - the lowest in New Zealand interest rate history. The two-year fixed term rates are 3.75%.

It’s worth mentioning that, although some Chinese banks (e.g. Bank of China) offer better home loan rates than NZ’s major banks, they don’t offer cashback to their clients. So, it’s not comparable. 


2. Are rates for investment property loans the same as home loans?

Some New Zealand banks, like BNZ and Westpac for example, charge higher rates for investment loans than residential owner-occupied loans.

BNZ’s investment loan rates are 0.25% or 0.3% higher than their home loan rates; the difference for Westpac, though, is not as big.

Not every borrower is eligible for special mortgage rates. So, when it comes to different loan types, expect that banks will factor in your personal circumstances when they offer you rates.

Lenders use interest rates as a magnet to draw customers in and compete for their business. Whilst interest rates are important, the lowest offers can often mask other pitfalls you need to be aware of. So, we highly recommend you don’t decide to choose a lender solely based on who offers the most attractive interest rates. 


3. Will New Zealand mortgage rates go down further in 2019? 

Some economists predict that the Reserve Bank will decrease the OCR one more time at the end of 2019.

However, in our informed opinion, we don’t think mortgage rates would go down dramatically, even if the OCR did decrease further.


Here are the reasons behind our opinion:

When banks decrease their home loan rates, they must decrease their term deposit interest rates too. However, New Zealand banks can’t decrease their term deposit rates too much, because having enough aside in domestic deposits enables them to lend money. If the deposit rates aren’t attractive, many domestic savers may consider investing their money elsewhere, instead of a bank.

What’s more, RBNZ may require New Zealand banks to hold more capital, which will lead to an increase in lending costs. If the OCR only drops by a little, banks may decide to not pass their additional costs to their customers. As a result, the supposed cut in mortgage rates will be offset by the cost increase. Therefore, banks may decide to only slightly lower their interest rates or make no change at all. 


4. How long should I fix my mortgage for in 2019?

Is it best to re-fix your loan to a one or two-year fixed term with a lower interest rate, or have a longer term? The answer is: it depends.


When should you choose a short-term fixed rate?

If you do not expect your family net income to decrease within the next two years, we highly recommend that you take advantage of the current special rates and fix your mortgage within two years. This will allow you to re-fix your mortgage with potentially better rates, should the interest rates drop further in the near future. Also, if you decide to break your short-term fixed loan, the break costs associated with this are likely to be less than a four or five-year fixed loan.

Fixing your mortgage with the lowest rate is not the best decision for everyone though. In some situations, you might require more certainty and a strategy that minimises the risk of loan repayment increases.

So, when should you choose a medium or long-term fixed rate?

If you plan to have a baby, start a business, change your full-time job to part-time, or undergo any other major life events that may cause your family net income to decrease in the next two years, we highly recommend you fix your mortgage, or at least some of it, with a longer term.

What’s more, if you have a large loan, say, one million for example, you might need to consider fixing some of your loan for a longer term. Fixing your loan for the long-term will help you minimise the risk of future interest rate increases and higher mortgage repayments. This strategy, therefore gives you some time to prepare for future interest rate increases, or for changes in your circumstances or financial situation.


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.


Prosperity Finance - here to help

Prosperity Finance understands the complexities of the OCR and what that means for borrowers. We help you navigate the mortgage process from beginning to end, and empower you to make the best long-term, informed decisions. As professional mortgage brokers, we’re here to help. Whether you’ve already got a mortgage or you’re ready to step onto the property ladder, give us a call today on 09 930 8999.

Other Recommended Blogs:

Should I re-fix my mortgage now or wait for my fixed term to expire?

Should I fix my mortgage to a three-year fixed term to capture lower interest rates of 3.95%?

How much more mortgage can I afford? (Tips to quickly increase your borrowing power by 800k)


Tags: