Commentary among financial gurus is starting to form a single opinion: interest rates are about to decrease
Over the past two years, average mortgage interest rates have more than doubled.
Just in case you missed it, this surge was in response to a steep increase in inflation. Now, there are signs that the tide of inflation and interest rates could be starting to turn.
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. Higher interest rates have been the medicine to treat the inflation of recent times. Although inflation is still sticky here in New Zealand, in many places overseas it has started to fall, often quite steeply.
Inflation in the United States is now 3.4%, 4.0% in the United Kingdom, 4.3% in Australia, though is still stubbornly higher in New Zealand. While inflation is still elevated in New Zealand, the most recent data indicates it has started to fall here too. So, financial gurus are now mostly in agreement it’s only a matter of time before our national inflation rate falls too, and with it our interest rates should come down too.
Mortgage Interest Rate Drops Have Started
Mainstream banks such as BNZ and KiwiBank have already adjusted down some mortgage interest rates.
The mortgage market is competitive, so expect announcements soon from the other big banks.
How Fast Will Interest Rates Fall?
This is where opinions start to vary among the economists at the big banks, the few independent economists, and other financial experts.
Some say inflation might fall rapidly, while others point to supply chain issues overseas which may keep many imports, such as oil, more expensive than we’re accustomed to.
How Much Will You Save in Interest Payments?
This question is top of mind for any homeowner 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.
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 Reserve Bank’s interest rate which influences other interest rates.
The Reserve Bank 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 been enjoying the 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!
The sentiment seems to be their time in the sun is about to fade. Interest rates for savers will nearly certainly drop.
Term deposit rates over longer timeframes have already come down slightly.
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, you should negotiate and shop around. Most banks will discount their headline home loan rates if you have strong financials, and sometimes, they may give a better deal to a new customer 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.
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