Brokers are advising New Zealanders to avoid locking in long-term mortgage rates, despite major banks offering lower rates right now. They believe it’s better to choose shorter-term rates as borrowing costs are expected to drop by the end of the year.
Thank you for reading this post, don't forget to subscribe!Recently, ANZ became the first major bank to offer mortgage rates below 6%, reducing its three-year special rate to 5.99%. Other banks like ASB, BNZ, and Kiwibank soon followed suit, lowering their longer-term rates to similar levels.
Gareth Veale from EasyStreet Mortgages suggests that it would be unwise to lock in a three-year rate at 5.99% now. He advises homeowners to wait for interest rates to potentially drop to the low 5% range.
“The key is not to lock in for too long because you might end up paying more in the long run,” Veale told OneRoof. He predicts that in six months, one-year rates could be at 5.99% without the need to lock in for a long term. “Three years is a long time, and in 18 months, interest rates could be in the low 5s or even 4s.”
Veale also mentioned that borrowers might be able to negotiate better rates than the current six-month terms offered at around 6.99%.
Claire Williamson from My Mortgage said most of her clients are choosing to refix at the high 6% rates for six months. She pointed out that while some people might just see the advertised rates and fix directly with their lender, it’s important to weigh the pros and cons based on individual needs.
Some people might prefer the convenience of refixing every six months, while others might opt for a 12-month term for ease.
Kelvin Davidson, chief economist at CoreLogic, emphasized the importance of budgeting when choosing to fix for six months, as it would cost more in the short term. “It’s a tough decision because you’re paying more now, but you have to hope that interest rates drop enough in the next year or two to make it worthwhile.”
According to Reserve Bank of New Zealand data, people are still mostly fixing for one year, but there’s been a slight shift towards six and 18-month terms recently. This shift is likely due to predictions that the Official Cash Rate (OCR) will be cut soon, with the first cut expected in October.
Davidson explained that an OCR cut is likely a matter of when, not if. “If it happens in October, there might be another one in November, which could lower short-term mortgage rates even more.”
Jarrod Kerr, chief economist at Kiwibank, expects the Reserve Bank to update their forecasts soon, potentially moving the timeline for OCR cuts from the end of 2025 to the end of 2024. He believes that while the Reserve Bank might not cut the OCR in their next meeting, October is a “live month” for potential cuts.
Kerr also noted that wholesale interest rates have already fallen, allowing banks to lower their rates without the Reserve Bank cutting the OCR. This is because the market has already priced in anticipated cuts in October and November.
Internationally, changes are already happening. The Bank of England recently reduced its base rate from 5.25% to 5%, and the Federal Reserve in the U.S. might drop rates by 25 basis points in September.
In summary, brokers recommend that homeowners stay flexible with their mortgage terms, as significant rate cuts are expected soon. This approach could save money in the long run as borrowing costs decrease.