Mortgage-holders in a fix - just how low can rates go?

OPINION: Choosing how long to fix your mortgage interest rate for is about balancing two options: getting the cheapest rates - typically the one to three-year rate - versus having some certainty around what you are going to pay for the next four to five years.

For mortgage-holders (and brokers), the past ten years has been a constant nagging feeling that this was the lowest interest rates could get to and, therefore, perhaps they should take a longer fixed rate option, only to have this disproven the following year. In February 2015, one of the banks released an option to lock a mortgage in for ten years at 5.89 percent. The excitement generated from the ability to have such “a low rate for so long” caused a lot of people to either refinance their mortgage or express mild fury that the other banks weren’t offering the same option.

But if you have mortgage at the moment, you have a forecast of interest rates the likes of which has never been seen before. Firstly, the Reserve Bank has committed to leaving the OCR at 0.25 percent for a year until March 2021 so we know that interest rates will be fairly stable for the very short term. Secondly, just like in 2008 with the GFC, we know that Covid-19 is likely to continue to disrupt the world economy and how we conduct business well into 2021. I’m not particularly pessimistic about New Zealand economy but we’re not going to see a solution any time soon either.

Based on that information, it would be a brave bet to take a longer interest rate option at the moment. The banks don’t generally release the data but I would guess that a lot of people are fixing for just one year; waiting to see what low interest rates are around in the middle of 2021.

These low interest rates are also increasing demand for property. Even in Auckland, rent was usually three percent of a property value and now buyers can purchase at 2.5 percent or lower. This, and the fact that many employees are increasingly confident that they will be employed in the near future, is bringing a rush of applications to the banks followed by packed open homes and auctions.

If you are looking to purchase, I recommend getting pre-approved early. The banks have a very slow turnaround time at the moment and it’s difficult to jump the queue as everyone has a deadline. Make sure you have a clear idea of what deposit you have and how you could increase that if required. Selling an unused car or help from the Bank of Mum and Dad will make your application a lot stronger.

Finally, as a result of the LVR changes, investment property is much easier to purchase than even just six months ago. Most banks are allowing 20 percent deposit and so for a lot of buyers, the only hurdle is proving you have enough income to meet the bank criteria.

- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.