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Where Does It End?

Where Does It End?

Low rates are here to stay, but It’s now floating rates that are catching our attention, writes Ryan Smuts.

By: Ryan Smuts

1 July 2020

We’re almost halfway through the year and rates remain at historic lows. Looking back to the start of the year, pre-Covid-19, we were seeing rates in many cases almost 1% higher than they currently are now - it seems like a long time ago. Most of the commentary out there seems to indicate rates staying low, and with the OCR locked where it is until early next year, it seems like we’ll be seeing these low rates for a while.

This month the big news has actually been in the floating territory, where Kiwibank have led with a floating rate drop of 1%, for 4.40% down to 3.40%.

This doesn’t include the discount that you may have as a customer, so it wouldn’t be uncommon for clients to find that including their own personal discount, they are sub-3% on a floating rate. It’s fantastic news for Kiwibank customers who are expected to save $20 million across 35,000 customers. On our end I know we’ve seen an uptake of Kiwibank lending requests.

At most banks you are still seeing fixed rates range from about 2.65% to 2.99% from one year right up to five years, which means you can fix in on any term and still be under 3%. For many investors it’s been a great time to fix longer and have the benefit of a very low rate on your investments, so not only do they perform better, but you have certainty around repayments for an extended period.

On the shorter end for the fixed rates we’ve seen many clients opt for the one year in anticipation that rates may be lower soon, plus having the benefit of having the lowest possible rate. Some banks such as Bank of China have reduced their one-year rate down to 2.55% and HSBC is not far behind them at 2.60%.

Economist Tony Alexander suggested the possibility that due to our economy coming out of lockdown “earlier, in better shape, and with greater increases in spending and economic activity than had been anticipated” there may be some upward pressure on interest rates – but he expects further developments on this to give more clarity in the coming weeks.

As a borrower, having a mixture of terms is always a smart move as it gives you the benefit of certainty along with hedging against interest rate fluctuations. It always depends on your personal financial position, and overall goals and intentions, but in the current low interest rate environment it may make sense to fix your lending with some of your debt on a longer-term fixed rate to enjoy some certainty, while also having a smaller portion on a shorter term fixed rate and perhaps even some on floating to allow yourself to repay debt more aggressively should you need to. Taking advantage of the lower interest rate environment could be the difference in how your property investments perform over the coming years.