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How COVID-19 could impact on home loan rates

Will the interest rate on your home loan be affected by COVID-19? As lockdown restrictions loosen and the initial shock of living through a pandemic recedes, people are starting to look at the ongoing economic effects of the crisis. Whether interest rates will drop or rise is particularly concerning, because changes to rates can have a significant impact on homeowners’ ability to pay their mortgages.

People who are concerned about losing their jobs or losing income will be looking for lower rates, as a drop could help them hang onto their homes, even if the worst happens. Rates rising, on the other hand, could make it far more difficult for some households in the wake of the crisis.

We’re living through unprecedented times, so it’s difficult to predict any change with absolute certainty – but here’s the Global Finance take on what to expect.

Don’t expect a significant drop

Unfortunately for homeowners looking forward to a drop in mortgage interest rates, we don’t expect that to happen. But don’t expect a rise either – interest rates will slightly drop and go under 3 percent and then stabilize.

Due to coronavirus, banks have seen a huge reduction in profits over the last four months. ANZ recently announced a 15% drop in profit (based on half yearly result) in comparison to this time last year, while Westpac has experienced a shocking 44% plunge. While other banks have yet to announce their results, they will likely have experienced significant profit drops as well.

As a result, banks will be doing everything in their power to boost profit margins – or at least stabilise them – over the next year. Lowering interest rates would reduce those margins considerably, so it’s unlikely they would make that decision unless other factors change.

High demand, stable rates

Another reason for lenders to keep interest rates where they are? Demand. New Zealand’s housing market means there’s a steady supply of borrowers taking out large loans, regardless of interest rates. With plenty of demand for home loans at the current interest rates, there is no incentive for banks to reduce them.

That means, unless there’s a significant change in the housing market and a subsequent drop in demand for home loans, rates are unlikely to shift. Although the virus could affect house prices and demand in some parts of New Zealand, we believe that it’s not likely to have a significant impact on the market as a whole. Steady demand for housing, along with stable pricing, means there’s no real reason for lenders to lower rates.

Keeping an eye on changes

As we’ve all learned over the last four months, things can change in the blink of an eye. At the beginning of the year, no one would have predicted a global recession or worldwide lockdowns. Now, we’ve all adjusted to our altered reality.

Although New Zealand may be lucky enough to escape the worst of the crisis in some ways, we will be affected by the global recession.

The pace of change means that predictions can only go so far. At Global Finance, we can’t see interest rates dropping any time soon, but like everyone else, we’re keeping a close eye on the situation.

It’s an uncertain time, but we’ll get through it together.

If you’re unsure about your financial future, or you need help with your home loan, get in touch with the team at Global Finance now.