Fixed vs. Floating: November 2016

Rupert explores what the new record low OCR means for your mortgage.


Another month and another OCR drop. The Official Cash Rate for New Zealand is now 1.75 percent—a new record low.


In response to the drop, all New Zealand banks chose to do absolutely nothing. In fact, two or three of them celebrated by raising their 3-year rates a little. 


Now, I know what you're thinking: "Those rascally banks. Trump was right, it's all corrupt."


But actually, this just serves to highlight that the Cash Rate works as an indicator of mortgage interest rates but it isn't as strongly correlated as we might think.  Overseas borrowing is expected to get more expensive and, as a result, the long-term interest rates are increasing.


This year, our cheapest interest rates have been between 3.99 and 4.05 percent (I know that one bank had 3.75 percent but they also deleted all the accounts with less than $100k in them so we're not counting them as a "bank of the people"). We're now seeing 4.19 to 4.29 percent even for the larger mortgages. We're still getting a healthy discount on the floating rate, so clients with a larger mortgage should be seeing around a 0.6 to 0.8 percent discount.


We're also seeing a lot of news about interest rates going up. We think that could happen but let's put it into perspective: Although rates may go up (and they've already gone up by 0.25 percent in the past few months), we're still not expecting anything over 5 percent for short term rates in the next six to 12 months. Historically, that's still pretty awesome!


With the addition of Trump, President Elect, now in charge of the Free World, we could see a bit of instability over the next six months (or four to eight years!), but we're hoping this will have minimal effect on New Zealand rates.


As always, it's important not to overthink the interest rates. The short-term one- and two-year rates are still a good option for minimising costs, and with the five-year rate well under five percent, it's still a good option for controlling your long-term interest rate fluctuations.


Rupert Gough is an Authorised Financial Advisor with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.