Mortgage Interest Rates Start to Fall

Peak mortgage pain is over as mortgage interest rates are falling. How low will they go?  

The tide of inflation and interest rates has turned. Interest rates have been cut for the first time in four years, and more cuts have been signalled.

Just in case you missed it, New Zealand’s multi-year surge in interest rates was in response to a steep increase in inflation, commonly called the cost-of-living crisis.

Background: Interest rates are primarily set by the Reserve Bank of New Zealand (RBNZ), the regulator of the New Zealand banking system. In simple terms, the RBNZ oversees the retail banks, including major players in our home mortgage market such as ANZ, BNZ, ASB, and Westpac, plus smaller players like Heartland and TSB. Higher interest rates have been the medicine to treat the inflation of recent times. The struggling New Zealand economy and steep drops in inflation in many nations overseas have caused the RBNZ to start cutting rates, even if our inflation levels haven’t fallen as fast as in many nations.

The RBNZ just cut rates for the first time in over four years, which is cause for celebration among many New Zealanders.

Mortgage Interest Rate Drops Have Started

This is great news for anyone with a mortgage.

Five-year fixed mortgage rates are already below their 20-year average, and shorter mortgage terms have been adjusted down, too. As the RBNZ has signalled more cuts are on the way, inflation is well down from its peak, and there is a deteriorating economic situation, pundits agree there’s plenty more room to cut rates moving forward. In this way, the bad news of a struggling economy is good news for mortgage holders. It’s also good news for many companies with debt, and many sections of the economy.

Clearly, the news is unwelcome for savers hoping to receive a reasonable level of interest on banked savings.

How Fast Will Interest Rates Fall?

The key question now rates are easing again is just how quickly they will fall. This is where opinions start to vary among the economists at the big banks, the few independent economists, and other financial experts.

A lot of this depends on the developing economic situation: our economy is struggling and there’s no shortage of layoffs, business closures, and liquidations. Also note the RBNZ also has a history of going quickly when it does cut rates, though note the common catch cry in financial circles of ‘past performance doesn’t guarantee future returns’!

On the flip side, rent, council rates, and insurance are all still seeing strong levels of inflation. Together, these could be reasons to keep interest rates a little higher for longer.

How Much Will You Save in Interest Payments?

A question that is top of mind for anyone repaying a mortgage!

Your potential savings will depend on how your lending is currently structured, who you have borrowed from, and the total amount of lending you have in the first place.

So long as your debt is coming off a fixed term, or is able to be restructured without unnecessary cost:

• ‍Property investors usually have the highest levels of borrowing, so they will stand to save the most from any fall in interest rates. So will anyone who recently borrowed a large sum, such as recent first-home buyers who haven’t been paying down their mortgage for long.‍
• If interest rates fall 1%, then everyone with $1 million in debt will each save $10,000 in interest each year, that is, 1% of $1 million.

The total fall might depend on something called the Official Cash Rate (OCR).

What Is the OCR?

The OCR is the RBNZ’s interest rate which influences other interest rates.

The RBNZ suggests the long-term neutral OCR is around 2%.

That means that when they are neither trying to speed up nor slow down the economy, the OCR should sit around 2%. Right now, they’re still trying to slow down the economy to tame inflation.

Here’s the important part: the one-year average mortgage interest rate has averaged about 2.5% above the OCR over the last 10 years. So, if the long-term neutral OCR is 2%, then over the long term, the one-year mortgage interest rate might hover around 4.5%.

Lower Term Deposit Interest and Saving Rates

Interest works both ways: it is paid by the borrower and received by the lender and depositor.

Those with money in bank savings accounts and term deposits have had a few years of safety, certainty, and increasing interest rates over recent years. They’ve also benefited from the steepest increase in interest rates in our country’s history!

Their time in the sun is already fading. Interest rates for savers are dropping away, and investors of all types now need to consider what life may look like as the next stage of the economic cycle sees interest rates head back down.

The Bottom Line: Mortgage Rates Will Fall, What Should You Do?

The future is always uncertain.

What the future means for you personally is even more challenging to figure out, as you need to factor in your own goals, plus what risks you might be willing to take to achieve them – or not!

This enables you to make practical decisions, such as choosing how long you should fix your mortgage interest terms for.

When it comes to a great overall mortgage, negotiate and shop around. Most banks will discount their headline home loan rates if you have strong financials, and often they give a better deal to a new customer as opposed to an existing customer.

It would be the pleasure of one of our mortgage brokers (mortgage advisers) and our team to help you make the most of the probable fall in mortgage interest rates, so get in touch today.