ASB's 1.79% Useful For Investors
A new rate for construction loans could be welcome for those looking at new builds, writes Kris Pedersen.
1 July 2021
The biggest news in interest rates over the last month has been ASB’s introduction of a market leading 1.79% floating rate for construction loans. While some of the fine print still needs to be clarified it appears to be exceptionally useful for investors in particular who are likely to target new properties with the expectation that there will still be some ability to deduct interest costs.
ASB has tapped into the funding for lending programme which the Reserve Bank introduced late last year where eligible banks can borrow directly from the Reserve Bank at the official cash rate (currently 0.25%).
When it was announced the intention was the RBNZ would make available up to $28 billion, however so far the drawdown rate has been quite low. It remains to be seen whether other banks will follow ASB’s lead.
This is a massive discount on other main bank floating rates which before discounts, in most cases, as can be seen in this page’s table are sitting around the 4.5% mark. The rate will be available to customers for up to three years from when they make their first draw down but obviously as per all variable rates can move if the Reserve Bank decides to change the OCR.
Inflation And Increases
Besides this story with ASB, the news around interest rates has really been around inflation and increases as longerterm rates in particular around the four to five year space are now firmly above 3% even when discounts are applied. We’ve also seen increases in the two to three year space which means it now becomes a trade-off between the best price (the one year rate) and the higher level of certainty provided by the mid to longer-term rates.
While most investors probably are not thinking about this now over time the loss of interest deductibility will also come into consideration here as well. On top of this if the Reserve Bank and Grant Robertson decide to restrict interest only lending the cashflow hit could become quite severe for borrowers which are already stretched.
ANZ business surveys have shown that cost expectations are “off the charts” which has resulted in their economists revising their interest rate predictions and expecting further increases to happen earlier. Rates going up would be a shock for many borrowers who since the global financial crisis hit in 2008 have become increasingly accustomed to decreasing interest rates.
If this eventuates it would be fair to say that this would also be a significant handbrake on the property market and slow it further.
The interest rates specified in this table were accurate on 17/05/2021. Interest rates are subject to change without notice. Different fees and charges apply to each loan depending on the mortgage lender. Seek expert advice to determine the mortgage lender that is right for you and your circumstances. A Disclosure Statement is available on request and free of charge. Data provided by tmmonline.nz