Interest rates might be low but that doesn’t mean the banks are keeping them that way. Brendon Ojala explores our fixed vs. floating climate.
First, the good news, interest rates are still at historically low levels. And if you currently own property, you will probably be feeling wealthier now than you did six months ago (for our Auckland friends this feeling of wealth increase has slowed somewhat of late, however, you have had your fair share of gains in this area in the last few years, so it is time to share the love).
Now, for the not-so-good news …
Bank Rates Are Up: On average, bank home loan interest rates have gone up around 0.25% to 0.5% over the last couple of months. And, in general, banks are tougher on lending money than they have been (see note 1 below).
Owner-Occupiers vs. Investors: Most banks are now differentiating between investment property loans and owner-occupied loans. The difference in interest rates being offered by some banks is between 0.1% and 0.2%. One bank is applying a fee now for processing new investment property loans or re-fixing investment property loans. (The rationale for this differentiation is because the cost of borrowing funds is higher for investment properties than an owner-occupied property—more on this to follow.)
Interest-Only: Interest-only loans are much harder to come by now than they have been previously. The feedback from banks is that they are nearing their capacity of interest-only lending based on the rules they operate under.
How big is Your Deposit? Lending with less than 20 per cent deposit is harder to come by than it was six months ago. (See above rationale from banks re: interest-only loans.)
Offshore Buying: If you are living offshore it is much tougher to get home loans in New Zealand now than it was six months ago.
So, given all this, what to do? Should I fix or float?
For the last two years, most of my clients have been taking the lowest interest rate on offer (that generally being the 1-year fixed rate). This was the strategy because the belief was that rates would stay low for some time.
In the last three to four months, however, I have noticed that many of my clients have been willing to pay extra for longer fixed rates, meaning that the 2- to 3-year rates are becoming more common.
The jury is out in terms of if the recent increases in rates will be sustained or if they will sit where they are now for the next period of time. I have heard commentary both ways, so it is pretty hard to pick right now.
Many of my clients are hedging their bets and taking some short-term fixed rates at the lowest price, some longer term and then keeping some in floating/revolving credit accounts to maximise the flexibility.
This makes sense to me.
What should you do? As we always say, everybody’s circumstance is different and what you will do depends both on your current situation as well as what you think will happen in the future. Obviously, the former is confirmed … the latter requires some crystal ball gazing.
As always, your friendly Velocity Financial adviser is more than happy to work through the details with you.
Note 1: The feedback from banks as to why interests have gone up, even though the official cash rate remains at historically low levels, is that they are running out of local deposit funds from which to lend. The banks operate under rules where so much of their lending needs to be done via deposits and they simply are not getting enough deposit money in to give out again in the form of home loan lending.
This means two things: One, they will lend less. And the loans they do lend will be more expensive. More expensive as they have to increase their deposit rates to entice more deposits, and more expensive because the offshore borrowing they can do, is costing more because overseas interest rates are increasing.
Two, the banks also believe housing prices are reaching the top peak so they are insuring themselves in the event of a correction in the market. And those sceptics among us may also suggest that the banks are increasing their margins to make some more profit.
Brendon Ojala is a Registered Financial Adviser 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.