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A New Decade

It’s the beginning of a new era and the Reserve Bank’s capital review will make for an interesting lending landscape, writes Ryan Smuts.

By: Ryan Smuts

31 January 2020

It definitely seems a competitive market out there and the start to the new decade has seen us continue the low rates of late-2019. Special rates across banks are extremely low with the one-year rate the cheapest across main bank lenders – it’s as low as 3.39% in some cases. We have seen slight increases on the two-year rate from some banks – previously 3.45%, now more commonly seen at 3.50% or 3.55%.

Over the coming months (and years) due to the RBNZ capital review it is likely to create quite an interesting landscape with regards to mortgage interest rates.

Due to the facts bank have to hold more capital (particularly the big four, which are Aussie owned and account for the lion’s share of our overall lending), we may see some upward pressure on rates over time. Banks have seven years to get to the required mark – so the decade ahead of 2020 is likely to see some interesting changes.

Out there it seems the opinion is that the cash rate may still reduce in 2020, which has over recent times seen reductions in mortgage rates for borrowers. With regards to the above comments around capital requirements, this may not translate accordingly in the year(s) ahead.

Credit Crunch

In addition there is talk across the market as to whether this will cause a credit in the near future. If banks don’t have as much capital to lend, we as borrowers may see tighter credit policy along with potential increases in costs to borrowers.

Another factor that could add to the likelihood of a tighter credit market is that a large percentage of funds are sourced locally for banks, combined with the fact that savings rates are so low at present, it may be difficult to attract the further capital locally. A problem here is that banks are now restricted on the amount of offshore funding they are able to have due to previous policy changes.

As a borrower looking at rates today, it makes sense with all of the above factors to not only chase the lowest possible rate – due to the fact that certainty is likely to become more important over time, and it is often worth paying for by locking in for longer. A good idea to get the best of both worlds may be hedging your bets so that some of your debt has low rates, and another portion has certainty. However, we are still in many cases seeing borrowers favour the shorter term rates – and with pricing this low, it’s hard to argue. For most local banks we’re seeing one to three year rates between 3.39% and 3.89%.

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