Lower and lower, that is the continuing track for New Zealand mortgage rates in 2019.

The current fixed-term rate of 3.15% hit the lowest in New Zealand interest rate history. It’s the best home loan interest rates ever.

You might be wondering how long I should fix my mortgage for 2019? Will interest rates go down again in 2019 and 2020? And what actions should I take to capture current low rates?

That’s why in this week’s blog, we’ll update with you the current (October 2019) mortgage rates and our forecast on 2020 New Zealand mortgage rates, so that you can make an informed decision on how long you should re-fix your home loans. We’ll also share some tips with you on how to pay off your mortgage faster, and some other useful things that you can do.

Your 2019 October New Zealand interest rates update (And what actions you should take)

Video Timeline:

1. October update: Current New Zealand interest rates -- 00:28

2. New Zealand mortgage rates forecast 2020 -- 3:11

3. How long should I fix my mortgage for in 2019 and 2020? -- 05:26

4. To take advantage of current low interest rates, how can I pay off your mortgage faster, borrow more money, and review my loan structure? -- 06:54

5. Prosperity Finance offer a free loan review service -- 08:28

October update: Current New Zealand interest rates

The New Zealand subsidiary of the Bank of China has launched a 3.15% of fixed-term rate, setting a record low in the New Zealand interest rates history.

To remain competitive, New Zealand major banks, ANZ, BNZ, Westpac and ASB have cut one- and two-year fixed-term mortgage rates to 3.55% and 3.49% respectively. They also cut five-year fixed rates to 3.99%.

No doubt, all New Zealand banks offer sub -4% rates, except for the floating rates.

Many of our clients have chosen to re-fix their home loan to a one-year fixed term, although the current two-year fixed term rates offered by New Zealand mainstream banks have a 0.06% advantage over the one-year rates. This is because home loan rates are becoming lower and lower, which is the continuing track for fixed-term interest rates in 2019. Many borrowers prefer re-fixing their loans to a shorter period, one year for example, then should the interest rates drop again in the future, they could take advantage of more favourable rates when their fixed terms expire.

It’s worth mentioning that some New Zealand banks, BNZ for example, offer higher rates to investment loan than residential owner occupied. This is because lending for residential investment property generally carries higher risks for banks compared with lending for owner occupied properties. What’s more, New Zealand Reserve Bank (RBNZ) requires banks to hold more capital, which leads to the increasing of the lending costs. Consequently, BNZ chooses to pass their additional costs to their customers. Other banks may follow BNZ.

New Zealand mortgage rates forecast 2020

Some property investors often ask will New Zealand mortgage rates go down further in 2019 and 2020?

Some economists predict that RBNZ would decrease OCR (Official Cash Rate) from the current 1% to 0.25% in May of 2020. Will the interest rates go down to the same level as the OCR drop?

In our 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:

Banks are profitable organizations. When they lend money to their borrowers, they require to gain at least 2% as their profits (the difference between interest income and lending costs). Based on this, it’s unlikely for banks to drop their mortgage rates below 2%, unless OCR drops to a negative value.

What’s more, RBNZ requires Australian banks to hold more capital, which will enable banks not to be vulnerable to the economic downturn. Also, holding enough capital will power banks to deal with a difficult situation if people ask to take their deposits out of banks. Currently, New Zealand subsidiary of Australian banks hold 8% as their capital while New Zealand local banks, Kiwibank for example, keep 15%. However, holding more capital means banks cannot make profits on this amount of money, which will lead to the increasing of the lending costs. Consequently, banks may choose to pass their additional costs to their customers.

As a result, some of the supposed cut in mortgage rates will be more likely offset by the cost increase. Therefore, it’s hard to say how much interest rates will be lowered in 2020.

How long should I fix my mortgage for in 2019 and 2020?  

Some borrowers choose to fix their mortgage with a one-year term. This will allow them to re-fix their mortgage with potentially better rates, should the interest rates drop further in the near future.

Fixing your mortgage with a one-year term 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.

To take advantage of current low interest rates, how can I pay off my mortgage faster, borrow more money, and review my loan structure?

Say your current mortgage fixed term is about to expire and you consider re-fixed your mortgage with a lower interest rate, if you keep repaying the same amount, so that more money is paid as the principle, not interests. As a result, you can pay off your home loan faster.

 

Some property investors want to take advantage of current low interest rates and borrow more money from mortgage, so they can grow investment properties portfolio.

However, not everyone has enough borrowing power to buy more investment properties. If you do have strong borrowing capacity now, investing more in properties might be a good choice for you. If you are not allowed to borrow more money now, you can wait for later because:

Recently in Australia, banks have reduced their mortgage test rates to 5.5%.

What’s a test rate?

When banks or other mortgage lenders evaluate your borrowing capacity, they will use their mortgage test rates to “stress test” your loan repayment ability. The test rates are higher than the actual mortgage rates. Which means, should your actual mortgage rates rise in the future, you should be able to cope with your rising loan repayment.

How can the dropped test rates affect your borrowing power?

Several factors affect your borrowing power; test rates are just one of them.

The lower the test rates, the higher your borrowing capacity. Compared to the past, you might be able to borrow more money now.

Compared to Australia, New Zealand lenders use higher test rates, from 6.9% to 7.25%, to calculate how much of a loan you can afford. As the interest rates keep dropping down recently, test rates in New Zealand may drop later, and it’s just a matter of time.

Prosperity Finance offer a free loan review service 

If you don’t have enough borrowing power or just don’t want to buy more properties now, it’s still a good idea to review your loan. Here, Prosperity Finance offers a free loan review service.  

The loan structure that was initially set up for you may no longer support your current situation or needs. Or, perhaps you have plans such as starting a family, upgrading your home or buying an investment property, but you are not sure how your finance should be adjusted to help you achieve your goals.

Prosperity Finance have helped many clients improve their loan structure to protect their asset, reduce loan interest, pay off their loan faster, and even give them the ability to buy another investment property based on the equity.

 

However, if your loan is not due for re-fix but you want to see if it’s worthwhile to break it and lock it at a lower rate. We can help you calculate how much you can save by re-fixing a lower rate, compare it to a break cost. We are always here to help you make decisions.

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 looks at your loans strategically, empowering you to make the best long-term, informed decisions. We are professional mortgage brokers and are here to help. Give us a call today on 09 930 8999. 

Other Recommended Blogs:

Is 2019 a good time to invest in property even though New Zealand’s housing market is flat?

Should I apply for my home loan from China’s banks to capture the lowest mortgage rates of 3.15%?

Changes to bank lending policies: An update on your borrowing capacity and high LVR loans