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Lowest Rates Ever

New Zealand is seeing the lowest ever interest rates available due to the COVID-19 crisis, Ryan Smuts gives his recommendations for borrowers.

By: Ryan Smuts

31 March 2020

What a time to be a borrower, with the lowest rates the country has ever seen.

March was the most interesting month in the interest rate market in recent years. We saw a reduction in the OCR on March 16, from 1% down to 0.25%, which is a drop of 0.75%. This is the largest drop since 2009, and was outside of the usual cycle of OCR reviews – it was supposed to occur on the March 25, and was expected to be between 0.25% and 0.50%.

This new OCR level has been committed by the RBNZ for the next 12 months. Multiple lenders have come out with reduced rates – from floating rate drops (major banks dropped their floating rates accordingly by 0.75%), with most banks now around the mid-fours for fixed rate changes. It is important to be aware that the floating rate decreases were off the carded rate, and if you have a discount on the floating rate, your discount will come off this. It is not uncommon at the moment for us to see clients with floating rates effectively in the high-three per cent range.

Fixed Rate Changes

In terms of fixed rates, it took a few days to flow through – but ANZ lead the charge dropping their one-year rate down to 3.05% and two-year to 3.35% for their special rates. Other banks were a bit slower than usual to follow, with lenders like BNZ dropping their one-year rate down to 3.09% but 18 months down to 3.05%. It seems banks are willing to match one another at the moment so the competition for business looks fiercer than ever. In addition to this, the capital adequacy requirements which were to come in this July have been pushed back 12 months, which potentially takes away one form of upside rate risk, but other factors are at play here – such

as quantitative easing, with the RBNZ confirming they will buy up to $30 billion of Government bonds owned by investors over the coming year. How this plays out in terms of putting money into the economy will be something to watch.

With COVID-19 and its long-term impacts unknown, it is hard to know what this may do to mortgage rates over time. If you are a borrower with fixed mortgages expiring in more than 60 days, it may be worth looking at breaking mortgages and seeing if there is any benefit. If you are within the 60-day timeframe (or 45 days for some banks) it is worth seeing what interest rates your bank may offer you.

But waiting a little longer might prove worthwhile if you haven’t seen your bank announce reductions just yet. Every situation is different, so if you are floating, get a discount applied, but it’s also worth calculating the difference in cost to you, should you choose to wait and see if better fixed rates are on the horizon.

For larger debt positions I am always in favour of a mixture of fixed and floating debt to allow yourself to hedge your bets in a changing interest rate environment. If you’re looking at adjusting your mortgages to interest only, or reducing your payments, it would make sense to touch base with your mortgage adviser or bank. This may alleviate some cashflow pressure.

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