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Is A Cash-Back Deal Worth Switching Your Mortgage To A New Lender?

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Is A Cash-Back Deal Worth Switching Your Mortgage? | Mortgage Suite

Should you switch your mortgage to another bank?

Currently, many banks are offering enticing cash-back offers to get people to transfer their mortgage lending.

But switching banks is about more than collecting a cash incentive.

You need to consider what’s actually involved in switching your mortgage to a new bank, and if it’s worth the effort

Here’s what you need to know before making a decision.

Are Cash Back Offers Worth It?

Currently, major lenders are offering cash-back offers to customers who are willing to move their mortgage to a new bank. When someone is offering you $10,000 to switch your mortgage, it’s a pretty tempting offer. We even managed to get someone a $50,000 cashback. But, it’s important to look beyond the immediate benefit of the cash and explore what’s really involved in a move.

What is a cash-back offer?

It’s an incentive a bank offers to encourage you to place your lending with them. The bank will give you a lump-sum of cash ranging in value, depending on the size of your mortgage. They don’t simply give this money for free though! There are some conditions involved:

  • Minimum Loan Amount – The amount of cash-back you receive is usually based on the size of your mortgage, with larger loans qualifying for higher cash incentives.
  • Lock-In Period – Most banks require you to stay with them for a set period (typically 2-4 years). If you leave early, you may have to repay the cash-back amount.
  • Competitive Loan Terms? – While the cash sounds great, it’s important to check that the new bank is offering a competitive interest rate and loan conditions.

Cash-back offers can provide an awesome short-term cash injection, but you need to ensure they make sense for your situation in the long run.

Are they worth it?

There isn’t a yes or no answer to this question, as you need to factor in:

  • Long-Term Costs – A cash-back offer will give you an instant financial boost, but is the new bank offering a competitive interest rate? Paying a higher interest rate over time could mean you actually spend more than the cash they are offering!
  • Break Fees – If your mortgage is on a fixed-term, you may find you have to pay a break fee to exit your current loan. This cost can sometimes cancel out the benefit of switching. Other fees, such as legal costs and valuation fees, may also apply. Sometimes, despite any immediate befits, it allows you to get out of higher fixed rate to current cheaper ones.
  • Loan Features – Thinking beyond interest rates and cash incentives, you need to consider whether the new lender provides better loan features. Some banks offer more flexible repayment options, offset accounts, or the ability to make extra repayments without penalty.

If the numbers stack up, a cash-back deal can be a smart move. But it’s essential to look at the bigger picture before making a switch.

What Is Involved in Switching Banks?

Moving your mortgage to a new bank isn’t as simple as just accepting a cash-back deal, and that’s the end of it. Here’s what the process typically involves:

  1. Mortgage Application – You’ll need to reapply for lending with the new bank, providing updated financial documents such as income statements, expenses, and debt details.
  2. Property Valuation – The new lender may require a fresh property valuation to confirm your home’s market value.
  3. Legal Process – Your solicitor or conveyancer will need to handle the transfer of your mortgage from one bank to another.
  4. New bank Accounts – Opening new bank accounts and transfer of AP’s and Direct Debits
  5. Settlement – Once all conditions are met, your loan is repaid with your old lender, and your mortgage is transferred to the new bank.

As you can see, switching your mortgage can take some time and energy. However, working with the right mortgage broker can make the process smooth and stress-free.

What You Need to Consider Before Switching

Before making the jump to a new lender, ask yourself:

  • Are you currently on a fixed-rate mortgage? – As we just mentioned, exiting your current mortgage early may attract break fees, which could reduce or eliminate any financial gain from switching.
  • How do the new bank’s rates compare? – A lower interest rate could save you more over time than a one-off incentive.
  • What fees are involved? – Some banks charge setup or legal fees, which may offset potential savings.
  • Will you need new valuations or documents? – Your new lender may require a new property valuation, which could come at an extra cost.
  • Does the new lender offer better long-term benefits? – Consider factors like flexible repayment options, offset accounts, or future borrowing potential.
  • What are your future plans? Your income, expenses and long-term financial plans should guide your decision. If you intend to sell your property soon, you need to consider how that might impact the conditions of your cash-back deal.

Why You Should Talk To A Mortgage Advisor First

Switching banks can be complicated, so you need to establish whether it is the right decision for you. A mortgage advisor can help you decide.

Here’s why working with an advisor is a smart move:

  • Compare All Your Options – Advisors have access to all the big banks and other lenders, so they can help you find the best deal beyond just the cash-back offer.
  • Understand the Fine Print – With a wealth of knowledge and experience, an advisor can assess the true cost of switching, including break fees and long-term savings.
  • Save Time & Hassle – From handling paperwork to negotiating with lenders, an advisor takes care of the hard work for you.
  • Get Ongoing Support – Even after you switch, an advisor can help you review your mortgage regularly to ensure you’re still getting the best deal.

Final Thoughts: Should You Switch?

Switching your mortgage lender can be a great financial move, but it’s not always the right choice for everyone. Before deciding, make sure you fully understand the costs, benefits, and potential long-term savings.

If you’re considering a move, the friendly team here at Mortgage Suite can help you assess whether switching is the best decision for you. Get in touch today for expert mortgage advice tailored to your situation!

How To Choose A Fixed Rate Term

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How To Choose A Fixed Rate Term

Sometimes, it can feel like a gamble to refix your mortgage.

Should you fix long, or is a short-term rate better, and what about floating?

The reality is that the best fixed term for you will depend on a mixture of the current market conditions and your personal financial situation.

Locking in for too long could mean you end up paying more interest if the rates drop. But fixing too short may leave you vulnerable to sudden rate increases.

Here’s what to consider when deciding on the right fixed-term rate for your mortgage.

 

Should You Fix Short Or Long Term?

As we’ve discussed many times, there are a number of things that can cause interest rates to fluctuate. Inflation, OCR movements, global influences, and economic status are all factors.

Paying attention to these factors can help you to decide the right rate term for you. Here is some general advice on understanding when each term is a good option.

When a Long-Term Fixed Rate Might Be Right

Fixing for a period of 3-5 years can be beneficial when:

  • Interest rates are expected to rise: If continuous rate increases are on the cards, fixing for a longer term locks in a lower rate before the hikes occur.
  • The Reserve Bank is tightening monetary policy: When inflation is high, the Reserve Bank often raises the OCR (which we saw during the COVID aftermath) which pushes mortgage rates up.
  • You prefer certainty and stability: When you lock in a longer term rate, you know exactly what your repayments will be for that fixed term. It’s great for budgeting and you won’t be surprised by an unexpected rate increase.

When a Short-Term Fixed Rate Might Be Right

Choosing a shorter fixed term of 6 months to 2 years can be beneficial when:

  • Rates are expected to decrease: If economic conditions suggest interest rates could fall, fixing for a shorter period lets you take advantage of lower rates sooner.
  • The Reserve Bank is loosening monetary policy: When inflation is tamed and economic growth slows, the OCR may be reduced to encourage borrowing and investment, this impacts interest rates and often brings them lower.
  • You want flexibility: Shorter term rates allow you to capitalise on changes in the market quicker. They are also great if you intend to sell your property to avoid break fees.

 

Personal Factors To Consider

While market trends and external factors play a role in choosing which rate is best, considering your own financial situation and goals is just as important.

Here is what you should be thinking about before locking in a rate:

  • Income Stability: If you have a stable, secure income, you may be comfortable taking a shorter fixed term to potentially benefit from lower rates in the future. But, if your income is less predictable, fixing for a longer term can offer peace of mind with consistent repayments.
  • Future Goals: If you are planning to upgrade, downsize, or move in the next few years then a long-term fixed rate might not be ideal. If you plan to sell your home soon, breaking a fixed loan early can come with costly penalties. However, if you plan to stay put for a while, a longer term rate might work in your favour.
  • Risk Tolerance: Does the thought of rising interest rates stress you out? Then, a longer fixed term may help you sleep better at night. Yet, if you are comfortable with a bit of risk and want to keep your options open, a shorter term may suit you better.
  • Repayment Flexibility: Extra repayments can shorten the term of your loan and reduce the overall interest you pay, but some fixed rate mortgages limit the amount of extra repayments you can make. Consider this when locking in. You may also want to split your loan – fixing part of it for stability while keeping some on a shorter fixed term or a floating rate for extra repayment flexibility.

 

What Should You Fix For Now?

General advice is great to have, but it’s also really helpful to have specific advice based on exactly what the market is doing here and now. That’s when it can be really helpful to have a mortgage advisor on your side. A skilled professional, like the team here at Mortgage Suite, can look at your situation and the current rates available to make a recommendation on the best solution for you.

Recently, the advice has been not to fix until ‘26. However, sentiment may be starting to shift. The thought is that inflation seems to have been tamed and the Reserve Bank can loosen monetary policy. But, borrowers need to be careful as rates are highly unlikely to drop to the 2-3% region that we saw around COVID-times.

“Nobody can predict the absolute bottom, but you have to keep in mind that a good rate in a normal world is 4% to 5%. People need to be careful not to anchor themselves with thinking that we might get to 2% or 3%, because that’s really not likely to happen.”

At the end of 2024, the advice was to float, or to choose really short terms, like six months to a year. Now, the advice is slightly different. “We’re encouraging people to think about spreading their risk, fixing a chunk of their mortgage for two or three years and keeping the rest on a shorter term. It gives you a bit more flexibility, as well as the benefit of those rates around 5%”

So, is 4.99% as good as you can get right now?

Many lenders are currently offering a two year rate of 4.99%, should you be jumping at it? Well, potentially. Adrian Orr of the Reserve Bank has labelled 4.99% as a great rate that provides certainty. “[It] means that as a borrower, you get the lower interest rate immediately rather than waiting for what happens to the OCR and competitive responses over the next six months.”

However, the Reserve Bank has indicated that they are likely to make to the OCR in the April and May reviews, so rates could still decrease further. With that in mind, the best thing to do is to consult a mortgage advisor before making any decisions.

The team here at Mortgage Suite would be more than happy to work with you to discuss the available options for fixed terms and rates to see which is the most suitable for your personal situation. Get in touch with us now to start the conversation.

How To Keep Your Finances Attractive To Lenders Over Summer

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Summer is traditionally a time of big spending.

With Christmas, family holidays and guests staying all rolled into one time period, the costs can start to add up!

However, if you are planning to apply for a mortgage or make a property move you will want to be mindful of what your summer spending might look like to potential lenders.

The good news is that you don’t have to live like Ebenezer Scrooge this holiday period just to keep your finances looking attractive.

We’ve put together a quick guide to make sure you can still enjoy your summer holidays without making any major financial blunders. Here it is:

Make Your Accounts Attractive To Lenders

A big part of being approved for lending is proving you are a responsible borrower. Lenders will scrutinize your habits so they can assess the risk factors of lending to you. You can prove your responsibility by ensuring your accounts look good by bank standards.

Here’s how you can do that:

1: Don’t Blow The Budget

Overspending is a big red flag for lenders, it can indicate you are not good with your money. A good way to keep your spending in line is to create a realistic budget and stick to it. When you create your budget, include your usual expenses, but also factor in your gifts, travelling costs and any festive activities.

The key step in making sure your budget is a success is sticking to it! You can use a simple spreadsheet or an app to track your spending and avoid unnecessary splurges. Proving you can stick to a budget goes a long way towards showing lenders you are in control of your finances.

2: Avoid Going Into Overdraft

Another part of displaying responsible spending is ensuring your bank accounts remain in the black! If you are frequently going into overdraft or dipping into your savings, then it’s not a good look. Plan ahead for your summer expenses so you can avoid going into unexpected overdraft.

3: Keep Up The Savings

Maintaining consistent savings is a really positive sign for lenders. Even small, regular deposits into your savings account make a big difference. Lenders like to see that you are building a financial safety net. If you can, automate your savings to align with payday so it becomes a habit even during the festive season.

4: Keep Your Income Steady

Does your income fluctuate seasonally? That’s pretty common if you are self employed or work in a seasonal industry. Unfortunately, fluctuating income can be a negative mark against your name for a lender. So, if you can find ways to smooth out your income month to month, it will gain you some brownie points. Side hustles or part-time work is a good way to bridge any income gaps and demonstrate stability.

5: Minimise Spending Splurges

When you apply for any form of lending, banks will review your accounts and spending activity. If you can limit excessive spending on unnecessary expenses like dining out or luxury purchases, it looks better for you. It allows you to present a more disciplined financial picture.

Big Mistakes To Avoid

It can be easy to get swept up in the excitement of Christmas. But, some financial blunders can make lenders think twice about approving your mortgage application. Here are the traps to avoid:

1: Running Up The Credit Card Debt

It can be tempting to swipe away and spend up large on your credit card over the festive season. Pre-Christmas and Boxing Day sales are particularly tempting. But, it’s important to remember that high credit card balances or late payments can damage your credit score. If you want to use a credit card for cashflow purposes or to gain reward points, then aim to pay off as much of the balance as you can each month – in full is best.

2: Buy Now Pay Later Schemes

While Buy Now, Pay Later schemes can seem convenient, they actually clutter your financial records and can even signal to lenders that you are living beyond your means. It is much better to pay for your purchases upfront or even put them on your credit card (then pay off the balance before it incurs interest).

3: Don’t Miss Bill Payments

With so much going on over the holiday season and the summer period, it is easy to get distracted and forget about paying your bills. To ensure that you don’t accidentally miss any due dates, it can be helpful to set up reminders or automatic payments. Also, make sure all your bill payments are covered before any discretionary spending takes place. This is a simple way to maintain strong financial records.

4: Overspending On Gifts

While it is nice to spoil your loved ones at Christmas, extravagant spending can eat into your savings and blow out your spending records. Instead of flashy gifts, consider some thoughtful, budget-friendly options instead. There are plenty of things you can gift that cost very little, think homemade options like cookies or even donating your time for gardenwork or other jobs.

5: New Borrowing

Taking out a new loan is not a good look when you are on a journey to buy a home. Whether it’s a personal loan for a summer holiday or financing a big-ticket item, avoid taking on new debt before applying for a mortgage. Lenders prefer to see a stable financial position free from recent borrowing.

Keep Those Finances Healthy

It is possible to have a fun summer break without breaking the bank and derailing your financial goals. It’s all about striking a balance between spending and sensibility. By budgeting wisely and avoiding costly financial missteps, you can set yourself up for success when applying for a mortgage.

This is not something that you have to tackle alone. If you are unsure about how to navigate summer in a way that the banks will approve of, then the best thing to do is to talk to a trusted mortgage adviser like the team here at Mortgage Suite.

Contact us today for expert tips and guidance on keeping your finances lender-ready, so you can enjoy the summer stress-free and still take the first steps toward owning your dream home.

Another OCR Cut – Now What For Your Mortgage?

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Another OCR Cut - Now What For Your Mortgage?

Another OCR announcement and another OCR cut. This is great news, of course.

But, just how great is it for your mortgage?

How much could you save and what is the best strategy from here?

Let’s answer all those questions now.

The Situation As It Stands

In their last OCR review of 2024, the Reserve Bank announced that they were cutting the OCR by a further 50 basis points, lowering it to 4.25%. They have also indicated that there will not be any further reviews until 19th February 2025. So, this most recent OCR cut was the last attempt to rejuvenate the economy for some time.

The previous OCR cuts do seem to be having an effect on the property market already. ‘In terms of mortgage numbers the total number of 19,273 loan commitments in October was the biggest in a single month since December 2021.’ Along with this proof of increased lending, the Reserve Bank is confident the housing market is recovering. It is forecasting house price growth of -0.2% for 2024, but feels the market will then increase, peaking at 7.4% growth in March 2026.

So, what does all that mean?

Basically, because the OCR and other factors are contributing to lower interest rates and there have been recent changes in lending conditions, the property market is picking up again. There is more confidence in the market with lower mortgage rates in play and probably further cuts to come.

This is good news for a lot of groups – first home buyers may be able to enter the market, people who were holding off on property moves might now be able to make them, and those with existing mortgages will see some relief in their interest rates.

How Far Will Interest Rates Drop?

Unfortunately, it is unlikely that we will see a 0.5% drop in all interest rates to match the 0.5% OCR reduction. As we have discussed before, the OCR is just one of the factors that impact mortgage rates here in NZ. There are a whole bunch of other factors to consider.

Currently, NZ’s economy is still sitting on the cusp of recession. We are either just in one or barely out of one. And global economies are not really fairing much better than ours. The USA is planning large tariffs on goods entering from Canada, Mexico and China, and the USA, UK and Australia are all facing stubborn inflationary pressures.

All of this is impacting the domestic cost of borrowing money for our major lenders. So, that is blocking the potential for large cuts on fixed mortgage rates currently.

All hope is not lost though. With a flurry of rate cuts on the eve of the latest OCR announcement and further cuts since, mortgage rates are still tracking down. There just isn’t the scope for huge cuts yet. It is likely that the longer term rates will remain high, with greater scope for movement in the shorter term rates.

How Much Could You Save?

Whenever interest rates start to go down, one of the biggest questions mortgage advisers get asked is, ‘Should I break my current mortgage rate so I can get a better one?’ The right answer to this question will vary depending on your personal circumstances.

When you agree to fix your mortgage at a certain rate for a set term, you are signing a contract with your lender. If you want to break that contract to try and save yourself money, you need to recognise that the lender may lose money. For that reason, they may charge what is known as a break fee to recoup any lost profit.

The amount of the break fee will depend on:

  1. The amount being repaid: The larger the amount, the higher the potential fee.
  2. The remaining term of your fixed-rate loan: The longer the remaining term, the higher the fee may be.
  3. The difference in interest rates: If current interest rates are lower than your fixed rate, the break fee will be higher.

For example, if you locked in a fixed mortgage rate of 5% but current rates are now 3%, the lender loses the extra 2% in interest for the remainder of your fixed term and would charge accordingly. That means, if you are considering breaking a fixed mortgage rate, you will need to weigh up whether the cost of a break fee will negate any potential savings you might get from fixing at a lower interest rate.

The best thing to do is to have a chat with a trusted mortgage advisor, like the team here at Mortgage Suite, before making any decisions. We can give you an indication of what to expect and whether breaking your current fixed term might be worth it.

What Should Your Mortgage Strategy Be?

There is always a lot to think about when it comes to your mortgage. Usually one of the biggest investments in your life, you want to make sure you have a strong strategy in place regardless of what your long term plans are.

For existing mortgage holders looking to refix: With interest rates predicted to fall further throughout 2025, the 6-month and 1-year rates are probably looking pretty attractive right now. The short term rates are popular because it means you can capitalise on any further reductions quickly.

For first home buyers: Now is an excellent time to enter the market as there are many listings available, interest rates are more reasonable than they have been in a long time, and lending conditions are more favourable.

For property sales and subsequent purchases: The same sentiment applies as for first home buyers, now could be a good time to make that move you had been considering.

For investors: DTI rules that came into effect in July could impact investment portfolio opportunities, but this could still be a time to explore your options.

The best advice we can give is to discuss your plans with a trusted mortgage adviser. Here at Mortgage Suite, we would welcome the opportunity to have this chat with you. Once we understand more about your situation, we can provide tailored advice to help you make the best decisions regarding your mortgage and also help you achieve your goals. Contact us now.

 

Should I Consider A Floating Mortgage Rate?

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Page Title: Should

The moment has come for mortgage holders, the mortgage rates are finally getting better!

The OCR has been cut twice with predictions of further cuts on the radar.

It’s all great news.

But, what do you do in this interim period while rates are tracking downwards, yet promise to go lower still? Should you fix or should you maybe consider a floating mortgage rate?

Let’s look at your options.

What Is A Floating Mortgage Rate?

Floating mortgage rates are a type of home loan interest rate that can fluctuate over time. These changes reflect what is going on in the broader financial space, along with the current OCR.

Because this interest rate is heavily influenced by the OCR and market conditions, the amount of interest you are required to pay on your mortgage can increase or decrease depending on what the market is doing. Obviously, this would change the amount of your repayments.

Considerations For A Floating Rate

There are a number of reasons why you might choose to “float” your mortgage payments:

  1. Flexibility

You can make extra repayments or pay off your loan early without incurring penalties, which can help reduce the overall interest paid over the loan term. This can be helpful if you are planning to move soon or to make a lump sum payment off your mortgage.

  1. Interest Rate Decreases

If interest rates do end up decreasing, a floating rate lets you take advantage of lower repayments immediately, as your mortgage rate adjusts to reflect the new market conditions.

  1. Short-Term Solution

A floating mortgage can be ideal if you expect to refinance, sell your property, or switch to a fixed-rate loan in the near future. This way, you avoid the restrictions and break fees often associated with fixed-rate loans.

While there are some good things about choosing a floating rate, there are some potentially negative aspects to consider also:

  1. Higher Rate

Due to the fact that floating rates offer borrowers such great flexibility, they tend to be higher than any fixed rates that the banks offer. So, you would need to factor in the additional cost that a higher rate attracts to work out whether it is the best financial option for you in the long run.

  1. Exposure

When on a floating mortgage rate, you are very exposed to market conditions. Rates can change without warning and on a daily basis. This will impact the amount of interest you need to pay, therefore potentially changing your repayment amounts.

It’s important to remember that while floating rates offer flexibility, they also come with risks. If interest rates rise, you could be looking at increased repayments. This can make budgeting more difficult as your monthly repayments may fluctuate.

Plus, floating rates do not tend to drop as quickly as fixed rates, so you could end up paying a higher rate unnecessarily.

 

Should You Fix Or Float Right Now?

As a general rule, choosing between a fixed and floating mortgage rate will depend on your current financial situation and property plans. If flexibility is a priority and you are comfortable with potential repayment fluctuations, then a floating rate might be suitable in the short term.

However, if you want to secure the best rates possible and prefer consistent repayments for budgeting, a fixed rate is probably the best for you.

Most New Zealanders do prefer fixed rates to floating with the vast majority of mortgages currently on fixed term rates. But, the question does need to be asked if floating rates are currently a viable option with interest rates tracking down.

Generally speaking, it is likely to cost you more in the long run to pay floating rates long term as current floating rates are upwards of 7.5%. However, if you are planning to sell your property soon or your fixed rate is due to expire around the time of a pending OCR decision, a floating rate could be a good interim measure.

Before locking anything in, it’s best to chat about your options and run the actual numbers with an experienced mortgage adviser. So, feel free to contact the team here at Mortgage Suite for honest advice tailored to your personal situation.

What About Refixing?

With interest rates currently falling faster than we’ve seen in a long time, you might be wondering when you should refix your mortgage if your fixed-term rate is up for renewal.

The answer is… wait as long as you possibly can!

Most lenders will start the discussion of refixing a couple of months out from your current fixed-term expiration date. But, with rates currently decreasing on what seems like a weekly basis, you could end up paying more interest than you need to by refixing too early.

Interest rates could fall by half a percent (or more) in two months and the difference it could make in your repayments is anywhere between $10 and $50 a week. That could be extra money in your pocket, which is very helpful for all families in the current cost of living crisis.

With the Reserve Bank set to make another OCR decision in November, it would be sensible to delay refixing until after that time if your current rate does not expire before then. It is expected that the OCR will be cut further in that November meeting, which will drive interest rates down even further.

Mortgage Help Is Always Here

In a decreasing market, it can be hard to know whether or not to fix your mortgage. And that doesn’t even include the worry about more specific questions such as when you should refix and how long for. That’s why it is sensible to ask for help.

As experienced mortgage advisers, we live and breathe the financial markets week in and week out. That’s why we can offer you excellent tailored advice that suits your situation. We can help you make a plan for your mortgage that ensures you don’t pay more interest than you need to and don’t miss out on the lower rates we are seeing from the banks.

Chat with us today for a no obligation review of your mortgage and advice about what is the best strategy for your plans and goals.

Why Are The Longer Fixed Rates Lower And Should You Take Them?

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Why Are The Longer Fixed Rates Lower And Should You Take Them?

In August 2024, the Reserve Bank finally did what all mortgage holders were hoping for and made a minor cut to the OCR.

This triggered a flurry of interest rate cuts from all mortgage lenders. Many of the longer term rates snuck under 6% for the first time in ages.

So, why are these longer term rates lower than the short term ones and should you be taking them?

Let’s answer those questions now.

Why Are The Longer Term Fixed Rates Lower?

Currently, the longer term mortgage rates are lower than the shorter ones, but that is not always the case. This situation has come about because of the current economic conditions and market expectations. There are a few reasons why this has happened:

  1. Market Expectations: When the OCR is predicted to decrease, lenders often price their longer term rates lower. That’s because they know their borrowing costs will drop over time. It makes offering more attractive long term rates less risky when it comes to fluctuating costs, they know they are not likely to lose money on the lending.
  2. Inflation: When inflation is set to decrease, long term rates can be set lower as lenders can have confidence that inflation will not erode the value of the money they lend. Lower inflation expectations reduce the pressure on future interest rates, meaning longer terms can be set at a lower rate.
  3. Bank Funding Costs: NZ banks source their funding from domestic and international markets. So, the cost of borrowing money can be influenced by global and local markets. If the cost of obtaining long term funding is cheaper than short term, the interest rates will reflect that.
  4. Competition: In a slow property market, there are only a small amount of new borrowers entering the market. So, lenders aggressively competing for market share will reduce their long term rates to appeal to borrowers looking for long term stability.

As you can see, no one thing will create lower long term rates. It’s all about lenders managing their risk profile, ensuring they cover off future uncertainties. In a declining market, we can expect the longer term rates to be cheaper than the short term rates, and vice versa in a rising market.

So, should you take the long term rates now?

Should You Fix Long?

As interest rates are expected to reduce further in the coming months, we would not necessarily recommend fixing for a 5-year term now. Of course, everyone’s circumstances are different, so the only way to get the best rate for your finances is to discuss your options with a mortgage adviser.

It wasn’t so long ago that the Reserve Bank was saying the OCR would not be cut until 2025. But, with weaker than expected economic conditions, they made the move to cut the OCR from 5.5% to 5.25% in August. In the wake of that announcement, economists tipped there could be further reductions of 25 basis points in both the October and November reviews.

As the weeks have progressed, sentiment has intensified and economists are predicting that an October rate cut is all but a certainty. They are saying the only discussion the Reserve Bank should have is whether that cut should be 25 basis points again, or bumped up to a cut of 50 basis points.

Why are we expecting these big cuts now when they were not on the cards two months ago? Well, it seems inflation has largely been tamed by the extended period of restrictive monetary policy, expected to fall within the targeted range of 1-3% in the September quarter. Inflation was the key driver for keeping the OCR high, so now that it is thought to be under control, rates can drop again.

So, in answer to the question of whether you should fix long now, we would probably caution against it as if the current trajectory continues, rates will continue to drop in 2024 and 2025.

Why Don’t We Have 30 Year Rates?

It’s interesting to look at other markets around the world to see how they compare to ours. The USA has a completely different mortgage market. It’s commonplace for Americans to lock in a 30-year term for their mortgages.

However, instead of their longest term rates being the smallest, like they currently are in NZ, they tend to be more than the shorter 10, 15 and 20 year rates. That is so the financial providers can cover the risk of rate movement within that huge term.

But, why don’t we have 30-year rates here in NZ? Imagine the joy of locking in a 30-year term at the glorious post-pandemic rates of 2%! That very point is part of the reason why our NZ lenders cannot provide fixed term rates for that long.

New Zealanders love a fixed term mortgage, in fact, 90% of all Kiwi mortgages are on fixed terms. But, we fix for shorter terms to play the market. You’d be hard pressed to find a fixed term longer than 5 years in NZ.

That’s because banks and other lenders need to protect themselves against future interest rate movements where rates may move above what the borrower has agreed to pay. Our mortgage market simply cannot sustain big gaps between borrower repayments and the cost of bank lending. The US market has the size and scale to weather the ups and downs of the wholesale mortgage market.

How Long Should You Fix For?

Here in NZ, we will have to stick with 5-year terms, with 30-year options not available to us. But, as we’ve just mentioned we wouldn’t recommend long fixes in a declining market. While those 5% figures might look attractive now, they will look less attractive as rates track down further in the coming months.

What we would recommend is chatting to a mortgage adviser about your current structure and the rates available to you. Often, mortgage advisers can secure rates that are better than the standard advertised figures, so we’d love to see how we can help you fix for the right term.

Contact the team at Mortgage Suite today for a free no-obligation chat.

Mortgage Rates Are Coming Down – How Long Should I Fix For?

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Mortgage Rates Are Coming Down - How Long Should I Fix For?

It happened!

Mortgage holders nationwide rejoiced at the recent RBNZ decision to lower the OCR.

The slight reduction from 5.5% to 5.25% has triggered a wave of rate cuts from all the major lenders.

So, the question now becomes, how long should I fix for?

Is it best to pick the shortest term as rates are on the way down, or would a slightly longer term create more savings?

Let’s explore the answer to that question now.

The Decision We’ve All Been Waiting For

On the 14th August, the Reserve Bank announced that it was cutting the OCR to 5.25%. It was the welcome news that we’d all been waiting for.

The response from the banks was almost instant.

ANZ trimmed their rates within minutes of the OCR announcement and it has been a bit of a race to the bottom since then. As we always knew it would be, the OCR was a major driver for creating lower interest rates, but it’s been helped by favourable wholesale rates too.

So, just how far are these rates going to go down?

How Low Can It Go?

As long as inflation continues to behave, the Reserve Bank has indicated there are more OCR cuts to come. But how many will there be and when will they happen?

Each of the major lenders is expecting a relatively steady downward track. They are all predicting two more OCR cuts in 2024, one at each of the October and November meetings. Then, predicting a downward trend at future policy meetings.

What they don’t agree on is how low the OCR will get and how long it will take to get there. Predictions range from a low of 3.75% by the end of 2025 to a low of 2.5% by mid-2026. In the shorter term, updated forecasts are predicting that the OCR will fall to 4.9% by the end of the year.

While we don’t know the exact numbers yet, we can all celebrate the fact that we seem to be beyond the peak of this cycle and better days are coming for our bank accounts!

 

What Does That Mean For Mortgage Rates?

So, if the OCR does settle somewhere between 2.5% and 3.75%, what will that mean for interest rates and your mortgage repayments?

Let’s reflect back on what rates looked like the last time the OCR was at that point. The year was 2015 and there wasn’t a whisper of a global pandemic in the air! The OCR was sitting at a stable 3.5% which translated to an average 1-year rate of approx 5.9% and a 2-year rate of 6.1%.

Will we see the same rates again this time around?

Well, that’s a question that is a little harder to answer. It is hard to predict exactly where mortgage rates will land. What we do know is that homeowners with more than 20% equity in their homes and a good payment history will still continue to enjoy lower special rates than what are advertised on the bank websites.

But, how low will those rates be? It’s fairly safe to assume that we probably won’t enjoy the 2% rates seen during the pandemic as those were created in extenuating circumstances. It’s more likely that the one and two year mortgage rates will settle in the bracket of 5% and 6%.

With all that in mind, what is the best move for your mortgage right now?

How Long Should You Fix For?

With the promise of a downward trend in place, the question is, how long should I fix for in the current market?

As always, the answer to that question will depend on your personal circumstances and plans – such as whether you are planning to remain in your home long term, invest or upgrade to a different property. But, there are some general considerations that can help you make a decision.

Let’s talk long term rates. At this moment, they might look pretty attractive, after all those are the rates with the 5% at the start of the number! But, if mortgage rates continue to trend downwards for the next year or so, they might end up looking pretty expensive pretty soon.

Anything more than two years is potentially going to cost you more in the long run. There is a reason that the one year rate is always so popular. It might cost you a little more upfront, but it does allow you to be agile in a market when rates are trending down. Chances are, locking in a one-year rate now will give you some small savings on what you are currently paying and will allow you to capitalise on the upcoming cheaper rates that are being forecasted for 2025.

In saying all of that, we strongly recommend speaking with an experienced mortgage adviser before making any decisions regarding your interest rates. That way, you can receive expert, personalised advice about the best move for your family right now.

Here at Mortgage Suite, we would welcome the opportunity to chat about your plans and secure the best possible interest rate deal for your circumstances. Get in touch with us today for an obligation-free consultation.

Why Are Mortgage Rates Going Down When The OCR Isn’t?

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Why Are Mortgage Rates Going Down When The OCR Isn’t?

In the last couple of weeks, the major banks have all announced reductions in their fixed term rates.

This is exciting news for borrowers and those with mortgage rates about to come up for renewal.

But, one factor remains constant… the OCR.

It has sat at 5.5% since May 2023. So, what is causing the mortgage rates to decrease?

Let’s look into that now.

 

Mortgage Rates Are Decreasing

Back on 11th July, Westpac was the first of the major banks to announce significant cuts to their fixed term mortgage and term deposit rates. They knocked 25 basis points off the popular one-year term to bring it down to 6.89%.

In the week that followed, the other major banks followed suit, reducing many of their fixed term rates also.

Then, in another shock move, just 14 days after they initially cut those rates, Westpac announced another round of rate cuts. This round of cuts were largely to match the rates their competitors had announced following the initial flurry.

We are eagerly awaiting a potential response from the other major lenders in the market to see who will be next to make the move to become the market frontrunner. As of 30th July, the major bank with the lowest 6-month rate was ASB with 6.99%.

So, why the sudden race to the bottom?

 

Why Are Mortgage Rates Going Down?

In previous months, we’ve indicated that the decision to move fixed term interest rates is largely tied to the OCR. But, the OCR has remained at 5.5% for the last eight Reserve Bank review sessions.

So, why are rates suddenly going down?

Well, there a couple of reasons for this. The first one is there’s a strong expectation that OCR cuts aren’t as far away as the Reserve Bank initially indicated. In their last policy announcements, they indicated things needed to remain restrictive until inflation is within the target band, meaning that the OCR would likely remain at its current level until the second half of 2025.

But, economists are not so sure this is the case. There are fears that the Reserve Bank may have gone too far with the restrictions and that OCR cuts need to made sooner rather than later. The general consensus around this is the cuts will come in November, but some are saying this could happen as early as August.

These recent fixed rate cuts could be a sign that the major banks are pre-empting an OCR drop with cuts of their own.

The second reason for the cuts could be because wholesale rates have “collapsed” in the last week. Wholesale rates are what banks are charged to borrow money from central sources. With the two-year swap rate hitting a low of 4.19%, it is the lowest rates seen in two years. It is thought the reduction has occurred thanks to market expectation that the Reserve Bank is planning OCR cuts sooner than they had initially indicated.

When the wholesale rates are lower, it costs less for the banks to borrow money. They can then pass those savings onto their customers, meaning the potential for lower interest rates.

 

When Will The Major Reductions Come?

It is very much a case of WHEN rate cuts will come now, not IF. This is great news for borrowers as interest rates are set to go down, but when will that be exactly?

That’s a question many people are asking while juggling the constant cost of living pressure. And it’s a question that might be particularly important to ask if you have a fixed term mortgage due for renewal soon.

As we mentioned earlier, the official prediction from the top economists is that we will likely see the first OCR cut in November. The feeling behind that prediction is that the Reserve Bank will want to see the latest inflation figures to confirm things are finally sitting in the 1-3% bracket they have been aiming for and these figures are not released until late October.

However with the economy continuing to look weak and June 2024 reporting the lowest number of new mortgages recorded since detailed data collection began, economists are suggesting that the OCR should be cut sooner.

However, due to the fact that the Reserve Bank indicated that rates increases may be required in their May 2024 announcement, it is unlikely they would do a complete 180 to introduce a cut in the August update. However, it’s not out of the realm of possibility!

What is more likely is a potential cut in October, as the Reserve Bank will be armed with reports about employment, GDP and business (which will give an updated view of how the economy is tracking) by then.

So, what is the verdict?

At this stage, the only thing that’s clear is that we don’t know anything definitely. The mentality of survive until 2025 is still very much alive! So, our recommendation would be to seek expert advice from the team here at Mortgage Suite before making any decisions about your mortgage.

We can offer tailored advice based on your financial goals and situation, aligned with what we believe is the best choice in the current market. Reach out to our team today for a no obligation chat.

Why Is It Taking So Long For Inflation To Go Down?

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Inflation. It is a word we’ve heard a lot of in NZ recently.

It is the reason monetary policy remains so tight and why the OCR has not yet come down.

So, why is it taking so long for the tough regulations set by the Reserve Bank to take effect?

Why is inflation so persistent?

Let’s have a look at the answer to this question now and what the predictions are for when we might start to see some relief in mortgage rates.

 

Why Won’t Inflation Go Down?

It is well known that the Reserve Bank (RBNZ) is being tough with its monetary policy to try and get inflation under control. The RBNZ want inflation to be within the target range of 1-3%. As of the last update, inflation is currently 4%. So, we are still sitting outside the target band.

Inflation is inching down slowly. It reduced by 0.6% between quarter 4 of 2023 and quarter 1 of 2024. But, on the whole, inflation is still being “sticky”. Why is that?

Inflation became so high largely because strong demand outstripped supply. The pandemic and other global events (like war) reduced the world’s ability to produce goods and services and also disrupted global supply chains. That meant prices for goods went up to meet demand in shortened supply, and people were willing to pay, meaning the economy remained strong.

Unemployment was virtually non-existent due to low migration throughout the pandemic. When the borders reopened, many people chose to leave NZ, further reducing the pool of workers. The appetite for businesses to pass their rising costs onto consumers has been high, and people began to expect price increases, fuelling further inflation.

That is why the RBNZ have had to take a hard line with the OCR, to restrict the economy and stop the price increases, thereby putting a stop to inflation.

Of course, these policies take time to have an effect on the economy, hence persistent or sticky inflation. As we’ve mentioned previously, there can be an 18-month lag between measures being announced and the effects being felt. That’s why it is taking so long for inflation to go down.

 

When Can We Expect A Change?

There are signs that we are winning the war on inflation. With budgets tight and the cost of living threatening many families, businesses know they cannot keep passing costs onto their customers. So, they will seek to make savings in other areas. Often, this causes unemployment rates to rise.

Fuel costs are also starting to drop. This is positive for the entire nation as everyone has somewhere to be and the cost for getting there will be lower. Shipping and transport costs will also be less of a burden on businesses and consumers. Many supply chains have recovered after the pandemic and national weather events, increasing the availability of vital goods. All of this adds up to reduced demand and inflationary pressure.

But, when will we see the change?

The latest inflation figures will be released on July 17. This will be a key indicator of when we can expect relief from the RBNZ. These figures will tell the story of whether the restrictive measures are really working.

It feels like inflation figures should be tracking down as in recent weeks the economy has become quite flat – spending has lessened and there are signs that the job market is tightening. If that is the case and inflation figures have gone down, the RBNZ will have more confidence to begin lowering the OCR, resulting in interest rates finally dropping.

 

What Are Economists Predicting?

We’ve heard every possibility being suggested in the first half of 2024. There has been talk that the OCR will go up, that it will come down, or that it will remain unchanged for the rest of the year.

The RBNZ are still sticking to their plan that we won’t see an OCR cut until August 2025. But the major banks are suggesting otherwise. In fact, BNZ econimists are of the opinion that interest rate cuts need to start as soon as inflation is under control.

Opinions of the major banks have ranged on when we should expect the first OCR cuts to happen. Initially they were all predicting February 2025, but in the last few weeks opinion has shifted.

“All the major banks are now pencilling in an OCR move down in November this year. The BNZ says the markets have priced in a 45% chance of an October cut and are absolutely convinced it will have happened by November.” [source]

While this is an exciting prospect, we need to keep in mind that this is still a prediction and not a certainty at this stage. As always, we would 100% recommend that you seek the advice of an experienced financial advisor, like the team here at Mortgage Suite, before making any decisions in regards to mortgages.

We’d welcome the opportunity to help you make the best decision for your situation. So, reach out to us for an obligation free chat about your mortgage or borrowing plans.

 

New Debt-To-Income Ratios: What You Need To Know

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The Reserve Bank has indicated that the debt-to-income ratios they had been signalling will be introduced from 1 July 2024.

We’ve previously discussed debt-to-income ratios, but now that the Reserve Bank has confirmed what their regulations will look like, it’s timely to explore DTIs in greater detail!

So, what are they exactly and how might they impact the borrowing power of New Zealanders?

Let’s discover the answer to those questions now.

 

What Is A Debt-To-Income Ratio?

The debt-to-income ratio being introduced by the Reserve Bank is a financial metric used to assess the ability of borrowers to manage their debt repayments in relation to their income. It’s calculated using the following formula:

Total Debt ÷ Gross Income = DTI Ratio​

That formula includes the following components:

  • Total Debt: An individual’s total debt includes all their outstanding debts, such as mortgages, personal loans, car loans, and credit card debt.
  • Gross Income: This refers to the borrower’s total pre-tax income from all sources.
  • DTI Ratio: The score that is assigned to an individual to demonstrate their borrowing power.

In practical terms, if a borrower has total debts amounting to $500,000 and a gross annual income of $100,000, their DTI ratio would be 5 (or 500%).

 

Why Is A DTI Important?

The Reserve Bank believes that the debt-to-income ratio is a good indication of what a person is financially capable of borrowing. They feel it is a critical measure to help banks, financial institutions and other lenders determine the risk associated with lending.

Having a low debt-to-income ratio indicates that you are a relatively safe lending option as you should be able to maintain debt repayments in your current circumstances. However, having a high debt-to-income ratio could indicate that you are over-leveraged and may struggle to meet your repayment obligations if your income were to decrease or interest rates were to rise.

By setting limits on debt-to-income ratios, the Reserve Bank is aiming to curb risky lending practices. If they limit high DTI lending, then it is less likely borrowers will take on excessive debt, reducing the risk of defaulting during economic downturns. They also want to ensure house prices don’t blow out as high levels of mortgage debt can drive up house prices, creating bubbles in the property market.

 

New Zealand’s New Debt-To-Income Restrictions

On 1 July 2024, the new debt-to-income restrictions will come into effect. Banks will need to comply with the new restrictions from this date.

“The DTI restrictions will allow banks to make 20% of new owner-occupier lending to borrowers with a DTI ratio over 6 and 20% of new investor lending to borrowers with a DTI ratio over 7.

LVRs will be eased to allow banks to make 20% of owner-occupier lending to borrowers with an LVR greater than 80% and 5% of investor lending to borrowers with an LVR greater than 70%.

‘Having both the DTI and LVR restrictions in place means we can better focus them on the risks that they are designed for while achieving the same or better overall level of resilience in the financial system. Therefore, activating DTIs means that we can ease LVR settings too.’ Christian Hawkesby, Reserve Bank deputy, says.” [source]

 

What Does It Mean?

Under the new restrictions, the new debt-to-income restrictions mean that a bank or financial institution can lend up to six times an individual’s gross income (that’s the amount you make before tax is applied) for an owner-occupied property. For an investor, they are able to lend up to seven times the gross income.

There are some exceptions to that though, under the new rules banks are able to make 20% of their lending outside of those restrictions. So, they will have the discretion to assess on a case by case basis borrowers who are outside the standard DTI criteria.

In the current market, these changes are unlikely to have much impact as high interest rates are preventing people from taking large mortgages they can’t manage. But, when mortgage rates go down, debt-to-income ratios could potentially come into play more.

The biggest thing would be if house prices were to increase significantly compared to household incomes or if interest rates were to rapidly fall. At this stage, that is not predicted to happen. The Reserve Bank has indicated they don’t intend to drop the OCR until at least 2025 and house prices are expected to stay muted for the next little while.

 

Where To From Here?

We still find ourselves in uncertain times. While the introduction of DTIs might not have much impact in the short term, it doesn’t change the fact that no one is certain of what lies just around the corner!

We still don’t know when mortgage rates will go down and there was even talk in the last OCR review that the cash rate might even increase later in the year. The latest RBNZ forecasts don’t have the OCR falling until September 2025, which feels like a very long time away!

What can you do in the meantime?

Well, we know many families are feeling the economic squeeze right now, so we would strongly encourage anyone concerned about their current lending, looking to refix existing lending, or who wants to explore the potential of new borrowing to seek the expert advice of a mortgage specialist.

We would love the opportunity to help you decide the right path for your current financial situation and long-term goals. Chat with our friendly and experienced team today for honest and practical advice that you can trust.

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