Fix or float?
With mortgage rates set to rise in the coming months, many of our clients are asking, what’s the right move for me right now? Fix or float? Should I lock-in for longer? Should I break my current loan and fix-in for a longer term at these great rates? We asked our Managing Directer, Lincoln Davie to weigh-in and clarify the pros and cons so you can make a more informed choice for your world.
Why are NZ interest rates on the rise?
Simply put, when world inflation kicks in, the Reserve Bank (RB) steps up to reign in our spending by raising our interest rates. The RB’s mandate is to keep NZ’s monetary markets and banks in a good, healthy financial place.
Why is it important that the Reserve Bank (RB) controls what kiwis have to spend?
Back when I was a kid in the 80s, inflation was out of control, interest rates were sitting at 20-21%. Rob Muldoon’s idea to freeze wages made things worse. This resulted in the RB being given its independence, and charging it with the task to keep NZ’s inflation between 1-3%.
It’s healthy for an economy to have some inflation, but it’s not healthy to have either too much or no inflation. Right now we’re spending so much money internally and when inflation begins to rise, the RB will then act to keep spending under control, and one way they can do that is by raising the Official Cash rate (OCR), which results in us having slightly less money to spend because borrowing money becomes more expensive.
Today the RB’s primary task remains the same – to keep inflation between 1-3%. So whenever they become concerned that our inflationary pressures are coming to a point where they could be pushed above that band of 1-3%, they’ll introduce means to bring it back into that band. Raising the OCR is one of their key moves, but they can also do things like, debt to income ratios, and loan to value ratios (introduced a few months ago where investors can only borrow up to 60% of the purchase price of the home).
These kinds of controls are used to help control the amount of money thats going out into our wider eco system.
How important is the Reserve Bank’s independence?
My opinion is that the RB needs to remain 100% independent of any political party so it continues to be prevented from being influenced by any political party agendas. You can never guarantee that any of the parties will always act in the best interest of the system in total. Independence from all the banks, and the politicians, acts as a guarantee that no agendas are placed upon its ability to act.
Many kiwis, myself included, are very, very nervous, at Labours recent moves to successfully legislate to bring in laws at the end of the year, removing the RB’s ability to remain truely.
This legislation will allow the Finance Minister of any political party in power, to place other mandates onto the RB. Meaning the RB will now have to take into account other considerations in their decision process when they’re controlling inflation, through the OCR. Whether it’s employment levels or housing levels, or anything else, these agendas ultimately mean the RB will no longer be truely independent. They’ll now have agendas being pushed on them from a political service. And it doesn’t matter whether that agenda is left or right, in my opinion, thats wrong.
If you were purchasing a home between now and Oct/Nov, would you lock in at 3 years on these current rates?
Most current home loan holders are currently fixed-in for shorter terms due to the continued low interests in the NZ market.
As the RB begins raising the OCR, it will have an immediate effect on interest rates from Oct-Nov this year, thats only 3-4 months away, so thats not very far. If you wanted to break your current loan, the cost of breaking it could be very minimal. And we can help you sort that simply and quickly.
Finder NZ Publisher, Kevin McHuge, recently advised that “Although it’s tempting to switch to a rock bottom one-year fixed-rate, homeowners should think about whether it’s smarter to stick with a slightly higher longer-term fixed rate instead”. And I’d have to agree.
At the moment we’ve got an opportunity, where we can fix-in for a longer term on the cheapest rates NZ’s ever seen (and is probably ever likely to see). And by fixing-in, for example for 3 years at 2.79%, you get peace of mind. You literally don’t have to worry about it for 3 years. My guess would be, that our natural place for interest rates would be to fall back into the 3-4% mark. Me, I’ve made moves to lock-in for 3 years.
Fixing-in now means you’ll be able to lock-in the cheapest rates now and save thousands.
How does all of this effect our First Home Buyers?
This may have a positive effect in some ways from a FHB perspective. Obviously part of this is what the governments hoping will happen as well. If you’re conscious that your mortgage payment amount is X, then your thoughts about what you’re happy to spend on buying a new home will drop.
At the moment everyones going, I’m happy to spend 1 million on a house because I know the payments are only X amount. So the cost of house almost becomes irrelevant. (It’s like a fairytale) People are just going, “well I know its only gonna cost me this much money to pay it, I can work with my budget so I’m ok. It’s a million bucks, yeah yeah.”
BUT as soon as interest rates rise, (there are a lot of people out there who’ve never experienced interest rates rising), so when they do rise, all of a sudden, they’ll be like “woah, wait a minute, do I want a million bucks of debt? No, 900K yeah“, so that will have a stabilising effect on the property market as well.
All this property growth thats currently been occurring over the last 24 months could slow right down, and depending on where in NZ you live, you could see house prices fall back a little bit.
What happens to the value of all these new million dollar properties that people have purchased over the past couple of years, at lower rates, spending more than they probably should have?
When you apply for your Home Loan, the bank works out if you can afford to borrow that amount of money (your servicing calculation). Their interest rate that they work it out on, is around 6%. There’s a massive buffer that’s built in there. So if you can afford it today on 2.79%, technically speaking, you can afford it on 4 or 5% too.
The important thing to remember here is that as a country we’ve entered into a low interest rate economy. We’re not going to end up back in the 10% range again because that would cripple NZ as an economy. That’s why I’m predicting that interest rates should settle back down around that 4% mark again. And that then gives the RB the room to move if we do have another COVID or another world-changing event, and stimulus is needed.
Is investing in property still a safe bet to make money in NZ?
If you’re buying a property as a family home, you should never view it as something you’re going to make money off. I know that lots and lots of people do, particularly over the last decade, but it’s still a dangerous way to view it. But in these circumstances, you’re primarily buying a home because you need a stable place to live. And as long as your plans are to get that home paid off by the time you reach retirement, it doesn’t matter whether the house is worth a million or 500K, it’s about the debt you don’t have – it’s about getting that debt paid down.
How can a Quantum Adviser help me?
Give me 10 years. Give Quantum 10 years to work with you and we’ll take you through owning that first home, to paying off that mortgage in full, to creating real financial freedom. It’s amazing what can happen in 10 years with solid management, strategy, sacrifice, and hard work.
That’s where engaging with someone like me, like our Quantum Finance team, is a game-changer.
We can show you the possibilities. You don’t know, what you don’t know. So let us show you how what may feel impossible, is possible in your world. We’ll show you how to turn your current financial position into opportunities, and then assist you to achieve it.
You can grow WEALTH. And we can show you how, for free.
Hey First Home Buyers!
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