As a first-time homebuyer or an existing borrower, you may very rightly be concerned about the recent increases New Zealand has seen in interest rates. However, the financial advisors at Global Finance anticipate that interest rates on mortgages in New Zealand are close to peaking.
The Reserve Bank of New Zealand has been gradually increasing the Official Cash Rate (OCR) over the past 18 months or so. The OCR has moved from its all-time low of 0.25% to 5.50%. This increase in the cost of borrowing for banks has led to a corresponding increase in mortgage interest rates. For example, in August 2021, the average one-year fixed rate for homeowners was just over 2.5%. Now, in less than two years later, the same rate is around 6.75%.
Good news is on the horizon.
We spoke to Aseem Agarwal, Head of Mortgages at Global Finance, and asked whether he thought interest rates in New Zealand are peaking. “Yes, in his opinion. Interest rates have neared their peak”.
Aseem believes interest rates might rise a little bit further, and due to the lag between Reserve Bank announcements and banks changing their lending rates, this will not be immediately after the anticipated rise in the OCR. However, it will only be a rise in the short term. He further predicts interest rates will then drop in future. However, these drops will be modest but not to the level of 2.5% what has been seen post Covid after March 2020.
Good news for both first-time home buyers and existing borrowers
A drop in interest rates offers more flexibility and affordability when it comes to taking out or fixing a mortgage.
But what about inflation?
Many people worry that rising inflation will keep interest rates high. One reason why Aseem believes that interest rates will drop in second half of 2024 is that the Reserve Bank of New Zealand is expected to pause its tightening of the OCR, once it can bring inflation under control, and Aseem sees an easing in the inflation rate by year-end.
“It is expected that it may be the last hike in interest rates from banks because inflation is coming under control. Servicing mortgages beyond this rate would be very difficult for thousands of borrowers and unrealistic for many first homebuyers to get new lending”.
So, what can you do to take advantage of the expected interest rate drop?
In Aseem’s view, if your current fixed mortgage is shortly coming to fix term expiry, then he is of the opinion that instead of opting for a longer-term fixed rate, it would be wiser to lock your mortgage for 12 to 18 months. However, each borrowers’ goals are different, therefore, he is of the view, while fixing your loan, you must consider your specific circumstances and should seek personalised advice from your financial adviser.
Why opt for the more expensive shorter-term rate?
Because by locking in your mortgage rate for too long, you risk being stuck with a high-interest rate. However, a longer-term fixed rate may offer stability and peace of mind, but it may also result in higher interest cost. If rates do drop in future, you may not be able to get advantage of it immediately.
If you only lock in your mortgage rate for a short period, you have the flexibility to change your mortgage and potentially save thousands of dollars in interest over the life of your loan when interest rates will drop. When you’re dealing with a large financial commitment like a mortgage, every little bit counts.
By waiting to lock in your mortgage rate for any term, you will have more information about the state of the economy and interest rates. For example, you can see how the economy is performing, whether inflation has fallen, as predicted, and what the Reserve Bank’s plans are for interest rates. This information can help you make a more informed decision about when to lock in your mortgage rate and for how long.
Interest rates are affected by more than just banks.
Aseem also reminded us that interest rates are influenced by a variety of factors, including the global economy, inflation, and political events. In New Zealand, we have an upcoming election followed by the Christmas period. Traditionally, banks don’t tend to announce their market strategies until February or March of each year, which is when Global Finance believes that rate drops may be announced in 2024.
With all things financial there is always uncertainty
That’s why it’s important to stay informed and work with a trusted financial advisor. Interest rate movements can be challenging, but there are strategies that can help you manage them. Careful planning and a bit of foresight can help you navigate the market and steer through the impact of interest rate changes. We can be there to help you can make the best decisions for your individual circumstances. For more information and personalised advice, you are always welcome to contact Global Finance Financial adviser on 09 255 5500 or send an e-mail to info@globalfinnace.co.nz
The information and articles published are true to the best of the Global Finance Services Ltd knowledge. Since the information provided in this blog is of general nature and is not intended to be personalized financial advice. We encourage you to seek Financial advice which is personalized depending on your needs, goals, and circumstances before making any financial decision. No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or its employees liable.