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Loan choices can save thousands

Tags: Residential Residential Views

Views on future interest rates vary but it pays to have a strategy to minimise payments. With home loan interest rates continuing to linger around historical lows borrowers could be forgiven for thinking it will always be this way.

However, recent months have seen conflicting views expressed about how and when rates will begin moving again.

Global investment bank Goldman Sachs made waves in July by predicting the Reserve Bank could hike the Official Cash Rate (OCR) – a key influence on the interest rates paid by home buyers – sooner rather than later.

Noting Reserve Bank inflation figures, Goldman Sachs’ chief New Zealand economist Andrew Boak said the official data was consistent with New Zealand’s “late-cycle growth story”, and could prompt the Reserve Bank to lift the OCR from 1.75 percent to 2 percent as early as February 2019.

This prediction placed a hike much earlier than what was tipped by other major New Zealand economists, whose consensus was that any decision to raise the OCR is unlikely until at least late next year.

A few weeks later Reserve Bank Governor Adrian Orr surprised the market by saying he expects to keep the OCR at its current level until well into 2020, reiterating earlier comments that the next move could be either a rise or a cut.

The discussion places renewed focus on the age-old question of how to best position your borrowing arrangements to make the most of current and future interest rate conditions.

Are you best to go with a floating or a fixed-rate loan? If fixed, for what term should you borrow to minimise the interest you will pay? These are questions borrowers need to consider carefully when taking out a loan to buy property – and ones that many will revisit repeatedly over the years, particularly as their fixed-rate loans roll over.

Choosing wisely can save you thousands of dollars in interest payments over the life of a mortgage.

In their latest Property Focus report, ANZ economists say they are no longer convinced the next move in the OCR will necessarily be a hike. In the current environment they see the most value in fixing for shorter durations, and consider the one-year fixed rate as the ‘sweet spot’ for borrowers.

“We continue to think the one-year fixed rate offers the most value. It is the lowest point on the curve and is short enough duration to benefit from rate cuts if they were to develop – as opposed to floating rate borrowing, which represents quite a step-up in costs at current rates.”

The average standard one-year mortgage rate among the ‘big four’ banks in August was 4.84 percent, or 4.29 percent for ‘special’ rates. For a two-year term, the rates were 5 percent and 4.49 percent respectively, with rates increasing progressively to 6.04 percent and 5.82 percent for a five-year term.

Of course each borrower should make decisions based on their own circumstances, and the choices may be seen differently by those for whom flexibility is an overriding consideration. Also, all the experts agree that even the best rates forecasts can be blown out of the water by unexpected events or shocks to the economy.

One strategy that can help smooth out interest expenses and manage the risks of being caught out by unfavourable rate changes is to divide your borrowing into several loans with a number of fixed terms that roll over at different times.

What is certain is that, if you decide carefully and get your strategy right, you can end up spending less of your hard-earned money on interest, and more on reducing your debt and making the most of the property and lifestyle you love.

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