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Take Advantage Of Low Rates

The cost of borrowing is at an all-time low, and the OCR looks likely to trend lower, writes Ryan Smuts.

By: Ryan Smuts

31 August 2020

We’re well into the second half of 2020, and also in the second stages of lockdown for New Zealand. Covid-19 has had a dramatic impact on our economy and it’s likely to have an impact in the future too. In terms of interest rates we’ve seen a dramatic dip since earlier this year, so the cost of borrowing is significantly lower.

Even as recent as three months ago you had one-year rates around 0.50% higher than they are now. In terms of borrowing on a $1 million loan, this is a savings of $5,000 per annum. This is just shy of $100 per week (after tax) income saved.

If you go back a little bit further the rate was about 0.25-0.5% higher even than this. This is a large part of the reason we’re seeing such increased activity in property purchases at the moment along with the fact that the amount people are receiving for their money in the bank (deposit rates) is much lower too – so people begin searching in other asset classes.

In terms of the mortgage interest rate market we’re seeing further reductions in certain areas – for example, recently you can get a one-year rate from most major banks at around 2.49%.

It seems some of the longer-term interest rates (four- and five-year) are trending up slightly into the mid-late threes, whereas not too long ago most lenders were willing to offer 2.99% for those terms. In an environment like this, long-term certainty might be a good bet, but with the OCR locked at such a low level, and it may even trend lower, it is unlikely we’ll see an increase in short term rates in the near future.

If the OCR does go further, to zero or even into negative territory, there are two main things to be aware of:

1. This doesn’t necessarily mean that we will immediately (as savers and borrowers) see negative interest rates that we can utilise. A negative OCR is based on wholesale rates, not retail rates, which are available to you and I. It might mean a further reduction in the rates we’re seeing, but they’re unlikely to head to zeros.

2. What it will do, is stimulate lending from banks. If it costs them money to hold funds (due to a negative OCR) this might mean that they want to get more money out the door into the hands of borrowers. This could come in the form of lower interest rates to increase borrowing, or even relaxed credit criteria.

We will be keeping an eye on this over the coming months, particularly with the effect the second lockdown will have in the future. Banks are very willing to help borrowers in dire situations. It makes sense to approach your bank in this scenario rather than sticking your head in the sand. There are various forms of relief available which could potentially assist you.

As a borrower, I’d suggest splitting your debt to allow you certainty, while benefitting from low rates on some short-term options. If you want to aggressively repay debt, a floating option might also be useful. Taking advantage of the lower interest rate environment could be the difference in how your property investments perform over the coming years.

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