Offshore and local commentary regarding interest rate changes is on the rise. What does this mean for you?
It’s hard to ignore what’s going on in America at the moment: Donald Trump’s Twitter fingers are working overtime, stoking fears of a global trade war, and the Federal Reserve is continuing down its planned route of raising interest rates and cutting quantitative easing – all of which is affecting the cost of borrowing money on the international market. But don’t worry, the sky’s not about to fall in any time soon … and mortgage rates here in New Zealand aren’t about to rocket skyward.
In New Zealand, our official cash rate is at the historically low level of 1.75% – and it looks likely the Reserve Bank of New Zealand (RBNZ) will leave it that way when it meets again. Most pundits don’t foresee any increases for at least a year, if then. Meanwhile, in the face of a cooling housing market that’s heading into winter, in recent months, the big banks have been busy competitively reducing their mortgage rates to attract new customers.
So why, when globally interest rates look set to start creeping upwards, are our banks able to do the reverse and lower their mortgage rates? There are three key reasons:
The first is our strong economy. While other countries have had to pare back rates to encourage growth, we’ve not had to make the same drastic cuts. For example, Australia’s official cash rate has been sitting at 1.5% for nearly two years. Our higher rate now gives banks more wriggle room to make discounts and attract new business.
Secondly, over the past year, our banks have enjoyed a big boost in savings, from individual account holders and businesses. The increase in deposits, close to 7%, has seen their reliance on offshore funding drop to a two-year low. This means, in the short term, they’re less susceptible to rises in global lending rates.
Thirdly, since 2013, our banks have been subjected to strict loan-to-value ratio (LVR) restrictions, aimed at curbing riskier investor lending and stopping house prices spiralling ever upwards. While this prudent approach has worked to calm the market, it has cut into the banks’ profits. Now that the RBNZ has started to relax those restrictions, banks are responsibly, but extremely keen to sign up new business, and are cutting their rates to lure customers.
Of course, as interest rates have been at record lows for a decade, it’s essential to factor any future rises into your finances when borrowing. But given the outlook is only for moderate rises over the next few years, now is a great time to take advantage of the continued low mortgage rates and a more balanced housing market.
Continued low interest rates mean:
• It’s a great time to sell
Whether you’re upsizing or downsizing, market conditions are ideal for a move. As the supply-and-demand equation balances out (slowly) and the heat leaves auction rooms, the fear of missing out has subsided. Prospective buyers now have more time to shop around, do their due diligence, and take time to secure a dream home.
• It’s a great time to invest in property
Our population is growing, housing unaffordability is still high, and there are plenty of renters in the market – both in the big cities and the regions. Add to this the RBA’s relaxation of the LVR restrictions, and it’s a perfect time to start, or consider expanding, your property portfolio.
• It’s a great time to become a first-home owner
If you’ve been patiently saving to build a deposit in order to take a first step onto the property ladder, the stars are finally aligned: the market has cooled, interest rates are at historic lows, and the competition between lenders for your business is high. What are you waiting for? It’s time to make your move!
• It’s a great time to invest in commercial property
As instability around trade, technology stocks and the end of quantitative easing continues to spook global share markets, it’s a smart time to divert investment into commercial property. The government is looking to invest in the regions, tourism is booming and big-box real estate is hot – so there’s plenty to get excited about.