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The Year Ahead

Ryan Smuts looks at what interest rates might do over the year and the best way to structure your borrowing.

By: Ryan Smuts

1 April 2021

As we head into a new financial year, we’ve already seen some dramatic changes in the property market in 2021. What lies in the year ahead is yet to be seen, but we anticipate a few things in regard to mortgage interest rates. We’ve seen them level out in the low 2s, with a couple of lenders offering market leading 1.99% interest rates. However, many have bottomed at around the 2.29% mark on their one-year term. It is expected that shorter-term interest rates are likely to remain low for the next couple of years.

When it comes to long-term mortgage rates, many commentators are suggesting we have seen the bottom and things are on the rise due to expectations in the global economy. Our long-term rates are more tied to what happens overseas, unlike our short-term rates, which are tied to the OCR. As a result, we have seen some lenders offer as low as 2.89% or 2.99% for four or five year terms, and many lenders were actually matching this. Recently we have seen lenders unwilling to match others, so there are a few(Westpac, BNZ, ASB) still offering this. But some others (Kiwibank, ANZ) show no sign of discounting their offers.

Floating rates remain somewhat unchanged, anywhere between 4.40%- 4.59% for most main-banks. Kiwibank is still the market leader here at 3.40%.

From discussions we’ve had with lenders, the Funding for Lending Programme (FLP) hasn’t been something that the banks have been aggressive in using. While this is likely to lower costs for borrowers, unless these funds are used by banks, it is possible we may not see much of a reduction in borrowing costs. It could (if adopted) reduce some of the short-term rates for borrowers – so this will be something that may assist in keeping the short-term interest rates low.

It’s always a reasonable strategy to split your debt on different terms so not all fixed terms expire at once. If you find yourself in a rising interest rate market then you’d prefer to have had more certainty at a better price. Keeping an eye on this will be important in the success of your borrowing strategy. Property prices and the hot market has been fuelled by lower interest rates.

Roughly 12 months ago a one-year interest rate was about 3.34%. Today that is around 2.29%. This is just over 2/3 of the cost, so those with interest rate expiries are seeing dramatic changes. For example on $1 million worth of debt, your interest costs go from $33,400 p/a ($2,783.33 p/m) down to $22,900 p/a ($1,908.33 p/m). This scenario is extremely favourable as a borrower, and theoretically you could borrow around another $458,500 and still pay the same amount in repayments a year later. You can see how this can drive prices up.

But if things went the other way, you’d be looking at a ~46% rise in interest costs. Look at your position and determine what level of debt you’re willing to have on shorter-term interest rates vs long, and whether hedging your bets is right for you.

The interest rates specified in this table were accurate on 11/03/2021. Interest rates are subject to change without notice. Different feesand 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

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