Interest Rates - Save $3,633.
Recently in the Property Investors Chat Group NZ on Facebook (great group to join by the way for both investors and first home buyers), the question was asked about peoples "thoughts on fixing mortgage loans at the moment with everything that's going on and what would be the best option?"
Below was my reply:
There is a lot of noise in the media at the moment on interest rates, its hard to know what to do! The simple fact is that Covid in the world is not going anywhere soon, as long as it is around in the way it currently is, our borders are not opening anytime soon. That means more and more hurt for our businesses especially in tourism and hospitality, which in turn hurts more businesses down the chain such as suppliers to those industries. It's a never ending cycle. Therefore the Reserve Bank has to convince banks to lend money, to keep the money cycle afloat.
If the Official Cash Rate goes negative then banks want to offload their money (over $200 billion in stores between them) as quickly as possible. This will happen March/April next year. Will we see bank interest rates go to 0%? No, but potentially into the mid 1%'s. My guess is 1.5% - 1.8% by May 2021.
So to awnser the question I would lock in one year at the current rates, then in September 2021 you should be looking at a 1.5% - 1.8% two year rate. Some may suggest staying on a floating rate till May 2021, however the cost of doing that outweighs the benefit by about $3500 (on the median NZ home mortgage) on the floating rate while you wait for the fixed rates to come down. You are better off being on the fixed rate for a little extra time next year until September swings around, then switching to the new loan rates. They may go even lower by then.
Below is the current home loan rates on offer by the major banks and 2nd tier lender 'Resimac'. All are based on 80% lending, 20% deposit.
I maintain the strong view that the Reserve Bank will drop the Official Cash Rate into the negatives at its review on 14th April 2021. I expect to see it go to negative 0.25%, soon after which the major banks will replicate this drop in their home loan rates to between 2.00% - 2.10% for a one year fixed.
Further to this, it is my opinion that the Reserve Bank will drop the Official Cash Rate further at its review on 14th July 2021 once banks have had time to adjust and manage negative interest rates. I expect to see it go to negative 0.50%, soon after which the major banks will replicate this drop in their home loan rates to between 1.75% - 1.90% for a one year fixed.
Ironically enough, I have three properties coming due for rate decisions in October, October and December this year. This is my own personal strategy and reflects my comments above.
- I will lock in the first two properties for a one year fixed rate in October 2020.
- I will lock in the third property for a six month fixed rate in December 2020. It is about 0.80% higher than the one year fixed rate but I am comfortable with this to then be making a decision in June 2021.
- In June & October 2021, I expect that rates will have settled and will look to make a longer term commitment to a two or even five year lock.
What could change this strategy is if the economy is in worse shape and the Reserve Bank hints at a further negative Official Cash Rate. In that case I will lock for one year in 2021 and keep repeating until such time as the economy stabilises here and around the world.
Below is why I don't like the idea of being on a floating mortgage until April next year waiting for the lower rates and then locking.
Scenario: $400,000 mortgage. Today is September 2020. Lower interest rates in April 2021. What is the difference between fixing & floating over 12 months?
Option 1 - Floating 7months @ 4.50% until April 2021 then fixed @ 2.00% through till September
= $10,500 floating 7months + $3,333 fixed 5months
= $13,833 interest
Option 2 - Fixed 1year @ 2.55% until September 2021
= $10,200 fixed 1year
= $10,200 interest.
Please share this article and perhaps we can save just a few people from that extra $3,633!