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Are Short Term Mortgage Rates Better Than Longer Ones?

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Are Short Term Mortgage Rates Better Than Longer Ones?

Are Short Term Mortgage Rates Better Than Longer Ones?

The question on everyone’s lips… when will mortgage rates start going down again?

Many economists are predicting that interest rates have reached their peak. And people are voting with their actions – 56% of new loans, bank switches and top ups are currently fixed at terms of 1 year or less.

But of course, you never know what could be just around the corner for the economy.

So, with that in mind, is a short term mortgage rate the way to go right now?

Let’s explore your options.

The Benefits Of A Fixed Term Mortgage

We’ve previously talked about the benefits of a fixed term mortgage. For a start, fixed term rates are generally lower than any floating option. Currently, floating rates are upwards of 8.6% and the highest fixed term rates are sitting just above 7.2%.

But, it is not just the cost saving that is beneficial. With a fixed term rate, you can gain certainty about how much your mortgage will cost you each month which makes it easy to budget for. This means it can be easier to manage your finances, giving you a sense of stability in a volatile market.

When interest rates are high, like they are currently, it can feel scary to fix your mortgage for any length of time because you will likely have to lock in a rate that is higher than what you are currently paying. But often, fixed terms still work out better for Kiwi households.

How Long Should I Fix For?

The Reserve Bank’s latest figures show as many as 59% of existing mortgages will have to move to higher interest rates in the next 12 months. That means the worst of the mortgage pain has not yet been felt by all households.

But, just how high will those higher rates be?

The answer is, no matter what happens between now and the end of 2024, interest rates will be higher than the glory days of 2021 when the average one year term was 2.2%.

So, how long should you fix for?

The answer to this question depends on your personal circumstances and your plans for the short and long term future. Short term mortgage rates are still high in comparison to the longer fixed terms. As of 30 April, BNZ have their 1 year rate listed at 7.24% and their 3 year rate at 6.65%. That is quite a significant difference.

Is Shorter Better?

The popularity of short term fixed rates is rising. In December, 36% of new loans, top ups and bank switches were fixed for one year or less. But, by February, that number was up to 56%. It shows an increasing preference to fix for a shorter term in case the interest rates drop in the near future.

While the logic is sound for this decision, it may not necessarily be the best strategy to fix for the shortest term possible. Here is an example scenario from BNZ chief economist, Mike Jones:

It’s possible to fix for two years now at about 6.80%. Alternatively, a borrower could fix for one year at about 7.25% and then, assuming rates do fall, roll onto a lower one-year rate in a year’s time.

“To ‘break-even’ on the shorter-term strategy, the one-year rate in a year’s time needs to be about one percentage point lower, so about 6.30%, based on current market pricing.” [source]

He says that while the scenario is possible and there could be value in fixing for one year at a time, forecasts don’t always go to plan. There could also be value in looking at a slightly longer term depending on your circumstances.

What’s The Plan?

So, how long should you fix your mortgage for if it is coming up for renewal soon? A short term mortgage rate or something slightly longer?

While there is uncertainty in the air as to when the rates will finally begin to drop, it is best to seek advice from a mortgage broker to see what is the right option for you. Fixing for a shorter term can give you the flexibility to jump on rate reductions or work with the property market. Whereas fixing for a slightly longer term gives you a better rate upfront and a set figure to budget for.

We’d welcome the opportunity to chat with you and establish which is going to be the best option for you in this current market. Get in touch with us today for a no obligation chat about your mortgage.

Where Does Your Money Go When Interest Rates Rise?

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Where Does Your Money Go When Interest Rates Rise?

In the last couple of years, interest rates have crept up and up.

In fact, many people’s mortgage rates have doubled since 2021.

We know the OCR has climbed, but is that the whole reason for skyrocketing interest rates?

With banks still recording record profits, you might be wondering where the extra money you are now paying for your mortgage actually goes.

Let’s take a look at the answer to where your money goes when interest rates rise.

 

Where Does My Money Go?

When interest rates rise, does the bank just pocket the extra money that you are paying?

The answer to that question is no. While banks are run as a business that needs to return a profit to their shareholders, they don’t simply take your additional interest payments as profit. Like any business, they have a product to sell and costs to cover. It just feels a little confusing as their product is money itself.

They need to lend out money at a higher rate than it costs them to acquire it. Plus, they need to cover all the usual costs of running a business, such as their staff and operational costs. Put simply, for the bank to continue functioning effectively, it needs to bring in more money than it gives out.

Interest rates bring funds into the banks. When their costs increase, interest rates must also increase to ensure the bank still operates with a profit.

 

The Role Of The OCR

To be able to lend money out, the bank must first obtain the funds to lend. One source of funding is from deposits in their customer’s checking and savings accounts, along with term deposits, loans, credit cards and the like.

The banks will put your money to work. While it is sitting in your accounts, you are effectively lending it to the bank, and they will pay you interest in return. Of course, your money is never gone, you can still access it at any time you need to.

In addition to using bank deposits as funding, the banks will also borrow money from the Reserve Bank and international sources. The OCR determines the cost of borrowing from the Reserve Bank. When this cost of borrowing goes up, the costs are passed down to the bank’s customers.

Likewise, if the OCR were to drop and the cost of borrowing fell, the bank would pass the savings onto its customers with lower mortgage rates. Movement in the OCR is one of the main reasons we see interest rates rise and fall.

 

Predicting The Future

When it comes to setting interest rates, there is an element of uncertainty for the banks. That is because, they cannot predict what will happen in one, two, or five years time. So, they need to factor that element of uncertainty into their rates.

For example, in 2021 all rate terms were under 3%. Now, in 2024, rates are above 6 and 7%. The cost of maintaining a 5-year fixed term that was agreed in 2021 has risen significantly which will ultimately impact the bank’s margin.

While using their expert economists to make reasonable predictions about what will happen in the future, there will always be unexpected circumstances that occur, such as a global pandemic! So, the interest rates they set must take a degree of uncertainty into account.

 

Your Money

As you can see, the extra money you pay does not just get gobbled up by your bank. It is simply that the cost of borrowing and lending increases and decreases depending on what is happening in the local and global economy. So, proportionally, the bank doesn’t take any more of your money when interest rates increase.

And, they may even end up giving some back to you. When mortgage rates go up, so does the amount of interest the bank will pay to you for any money you have in savings accounts etc.

But, no matter what the current financial state of the country is, you don’t want to pay more interest than necessary! A mortgage broker can help you with advice that is specific to your current situation, but as a general rule, it is wise to follow these tactics.

When mortgage rates are low and you expect them to increase, it is often best to lock in a longer term fixed rate for an element of financial stability. However, when mortgage rates are due to go down, shorter term fixed rates or even floating home loan rates can allow you to capitalise on any rate cuts when they occur.

 

When Will Rates Go Down?

The exact answer to the question of when interest rates will go down is still not clear. However, there is hope that positive news is not too far away. Many economists believe that we have finally hit the peak of mortgage pain.

We have already seen very minor reductions in rates and internationally, the interest rate cycle has turned. In the latest Monetary Policy Statement, the Reserve Bank has indicated they intend to keep the OCR at a steady level for a while longer, with potential cuts forecasted for the end of 2024.

Each of the major banks has varying opinions on when those cuts might take place, with some predicting August, some saying November, and others predicting cuts won’t happen until 2025. Opinions are still very much divided. The good news is that there’s a consensus that interest rate cuts are coming!

So, before making any decisions about refixing your mortgage or taking out new borrowing, we wholeheartedly recommend speaking with an experienced mortgage broker, like the team here at Mortgage Suite. We can give you helpful advice on what is the best move for your individual circumstances. Get in touch with us now.

Why Are Interest Rates So Volatile Right Now?

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Why Are Interest Rates So Volatile Right Now? | Mortgage Suite

2023 closed with the promise of interest rate relief hanging in the air.

The inflation numbers were going in the right direction and all the predictions were for the OCR to drop at some point in 2024, and interest rates with it.

Now, we sit on the eve of the first OCR decision of the year and we are being warned it could go up.

How did we get here and when will we see the relief we have been promised?

Let’s explore.

Why So Volatile?

The Reserve Bank has been very clear on its stance that they do not expect the OCR to drop until late 2025. Up until a few weeks ago, most economists were predicting otherwise. Some had forecasted as many as four rate cuts this year.

Then suddenly, ANZ is warning that the OCR could actually go up in the first review of 2024. While it is currently the only bank speaking of this potential, it is an about-face from the predictions we were hearing last year.

So, what has caused this change in opinion?

The Reserve Bank has indicated that the main reason that the OCR remains high (and could go higher still) is due to stubbornly resistant inflation. Despite some promising signs like weaker GDP data appearing and wholesale swap rates dropping at the end of 2023, the market has since reversed.

Because of that, predictions have changed.

Will The OCR Go Up Or Down?

The Reserve Bank is due to make an announcement on the OCR this week. ANZ is standing firm on the possibility that it could increase 25 basis points and rise to 5.75%. All other major banks are predicting that it will remain constant at 5.5%, the level it has sat at since May 2023. However, they have not ruled out the possibility of an increase.

What they are all in agreeance on is that the OCR is not ready to go down… yet.

This volatility is very common in a market that is about to change. There are signs that the Reserve Bank’s efforts are working. Inflation is tracking down, albeit slower than they would hope. Employment rates are also easing, but again, slower than the Reserve Bank would like.

The economy is shrinking, but migration rates remain high bringing much needed skills to NZ and making it easier for businesses to hire the talent they need. Great for the businesses, but not so great for the employment figures that impact the Reserve Bank’s decisions!

All of this indicates that things are heading in the right direction, but are they heading there fast enough to maintain the OCR at 5.5%? Only the Reserve Bank can decide that.

What Does It Mean For New Zealanders?

Everyone is starting to feel the pinch on their household budget. Rising interest rates and living costs are putting pressure on lots of NZ households. Unfortunately, that pain is not over yet and may even get worse before it gets better.

There is always a lag in changes to monetary policy and the resulting effects on everyday households. The OCR has been high for a long time now. Back in September 2021, the average interest rate on mortgage debt was 2.8%. Right now, it is sitting at 5.9% and is expected to rise to 6.3% in the next 6 months as homeowners continue to roll off their fixed rates set two and three years ago. Relief from these rates is still a way off.

While current monetary policy is working, it is happening much slower than expected. For that reason, the Reserve Bank is hesitant to make changes too soon and undo the work that has been done so far. They do not want to cut the OCR now only to have to raise it much higher in the future because of cutting too soon.

The best thing to do right now is to sit tight and try to weather the storm. Change is coming, we just don’t know exactly when it will be.

What’s The Plan?

In this particularly volatile period of finances, we urge you not to rush into any decisions. Change is coming, so making sensible decisions now is paramount.

Longer term interest rates may look attractive now, but you do not want to be fixed at a high rate for multiple years if change is on the horizon. While we can’t predict exactly when interest rate cuts will happen, we know they are coming. In the meantime, we can offer our best guidance based on a number of factors.

So, whether your interest rates are due to come up for renewal or you are considering buying or selling, now is definitely a time when you want expert financial advice.

Chat with a trusted mortgage advisor, like the team here at Mortgage Suite so that you can make the best move for your circumstances in the current volatile market.

What Will Happen To Interest Rates In 2024?

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what-will-happen-interest-rates-in-2024

New year, new interest rates?

That’s what most mortgage holders are hoping for anyway!

But, will it actually happen?

Let’s take a look at what’s been happening in the world of finance and property over summer and what the economists think will happen to interest rates in 2024 – the 12 months ahead.

Inflation

On 24 January, the new inflation figures were released. Currently, inflation is sitting at 4.7%. This is down from a peak of 7.3% in June 2022, but still outside the Reserve Bank’s targeted window of 1-3%. However, they had forecasted an inflation rate of 5% for this quarter, so there is evidence that the measures put in place to tame inflation have been working.

For the fourth consecutive month, food prices have decreased with a 0.1% fall in December 2023. It is hoped that annual food price inflation should fall below 3% by mid-2024 bringing some much-needed release to household grocery budgets. The prices of petrol, accommodation, tobacco and alcohol also eased in December, which was part of what helped inflation track downwards.

Senior economist Mark Smith has noted that the Reserve Bank will still be wary about the risk of inflation being stuck above their target of 3%. They are likely to maintain the OCR at a restrictive level for as long as it takes for inflation to sit below their 3% target on a sustained basis.

OCR

Right, so inflation is tracking down, does that mean we will see a reduction in the OCR? As we know, the OCR is a key determining factor in setting mortgage interest rates.

So, will the OCR go down? The answer is yes, but the rate cuts might not be as soon as we’d hoped.

The facts are that economists believe it won’t be long until we see the Reserve Bank switch from fighting inflation to reviving demand. There was even talk that the positive impact of the monetary tightening tactics implemented by the Reserve Bank was working well enough that we might see a cut in the first quarter of this year.

However, the big five banks are less optimistic about that happening. ANZ and Westpac are predicting no OCR cuts until February 2025, but that mortgage rate cuts could be seen earlier. ASB is predicting the first OCR cut in August 2024 and BNZ has a similar opinion, that the OCR will be cut in the third quarter of 2024. Kiwibank believes the OCR rate cut will take place in November. [source]

The Reserve Bank itself has not given any indication of when cuts might take place. And they are unlikely to give any warning for fear it might trigger backward progress on the good results they are achieving with inflation. However, inflation is not the sole consideration. They do not want to hold out too long, risking the economy falling into a state where significant stimulus will be needed to revive it. [source] It is a unique balancing act!

We can take comfort that across the board, OCR rate cuts are on their way. The only thing that is unclear right now is when these cuts will happen. We’ll keep you updated on what’s happening in the market on a monthly basis. If you haven’t already done so,   to receive the latest news straight to your inbox.

Property Market

The bottom kind of fell out of the property market in 2023, so what does 2024 look like?

The predictions are that the market will recover, but prices are not going to soar like they did in 2020 and 2021. Experts are expecting a small amount of growth in 2024.

They also believe that people are ready to buy and sell again. “Not because it’s boom and not because we’ve got past the bust, but the fact that it will be normal. We’ll see normal transactions, we’ll see stability in prices.” [source]

In the current market, things are quite predictable on the lending front. Borrowing is down, and with interest rates still showing no real signs of mercy, it is no surprise that shorter fixed terms are being favoured right now. [source]

Interest Rates

So, what does all this mean for interest rates in 2024?

Well, for a start, there is a bit of good news. Banks are currently more willing to negotiate and offer discounts in order to secure or retain customers. We are starting to experience that “there are big differences between what the banks’ advertised rates are and what can be negotiated” [source] This is especially true if you have a good payment history and more than 20% equity in your property.

In saying this, there seems to be more scope for negotiation on the longer term rates – 3, 4 and 5 year fixed terms – and less on the shorter term rates. The question is, are they hoping to tempt customers with a longer term fixed rate, knowing that all rates are predicted to come down in the not-too-distant future?

Late 2023 also had some encouraging signs with longer term interest rates being trimmed modestly. This was largely a result of international wholesale rates dropping by more than 100 basis points.

Whether short and long term fixed rates will drop in 2024 will be determined by inflation, wholesale rates and the OCR. It is expected that interest rates in 2024 will trend downward, the only question is when that will happen.

The best advice we can give you is to get in touch with a reliable mortgage broker, like the team here at Mortgage Suite, before making any major decisions this year. That includes buying and selling property, but also refixing current interest rates. So, drop our team a line, we’d love to hear from you!

10 Top Holiday Season Money Saving Tips

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10 Top Holiday Season Money Saving Tips

It is almost that time of year again.

Sleigh bells will be ringing, the weather is warming (hopefully), and you’ll be shopping up a storm for pressies and ingredients for the family Christmas meal.

But, this Christmas might feel a little different to previous ones. Especially if you’ve just refixed your mortgage at a much higher interest rate.

So, we’ve been busy making a list of all the nice things you can do to save some money these holidays so that you can avoid Santa’s naughty finance list!

10 Holiday Season Money Saving Tips

1: Set A Budget

It is super easy to overspend at Christmastime once you start grabbing presents for the family, decorations and groceries. But you can avoid breaking the bank by setting a budget for what you will spend this December. It doesn’t mean you need to scrimp and save, but be realistic about what you can afford when choosing the number.

2: Go Digital

Christmas cards are lovely, but once you buy the card and the postage for multiple recipients, the costs can start to add up. So, why not go digital and send electronic cards this year? Or record a video message with the family to share around. Cost effective, but still super personal. Plus, you never have to worry about it getting lost in the post!

3: Shop The Sales

In the leadup to Christmas, there will be plenty of sales at all your favourite shops. So, keep an eye out for holiday sales, discount codes and promotions when shopping for your gifts. It pays to start shopping early so that you can catch any sales that are run, not panic buying whatever is left on Christmas Eve!

You can also look for ways to take advantage of discounts in your regular spending. Some utility providers or other services offer discounts if you pay on time or via direct debit.

4: Secret Santa

If you have a big family, the cost of gifts can soon add up. Instead of buying a gift for everyone, Secret Santa is a cool way to still have fun and keep the costs down. To do Secret Santa, put each family member’s name on a piece of paper and put it in a hat, then each draw out a name. That is the person you have to buy for.

If Secret Santa isn’t your jam, then you can kick the fun up a level and play Santa Grab instead. Everyone brings a small wrapped gift and they are placed in a pile. Everyone takes a turn to either unwrap a gift from the pile or to steal a gift someone else has already unwrapped. Proceed onwards until all guests end up with a gift to take home.

Not only are these games fun, but they significantly cut down the gift spend as you are only buying one present.

5: Homemade Gifts And Experiences

Who says you need to gift a store-bought present? Why not get creative with fun homemade gifts or offers of help? Bake cookies, crochet snugglies, pot plant cuttings, or offer to mow someone’s lawn once a month. There are plenty of ways you can give a lovely, thoughtful gift that costs very little.

You can also use recycled materials to wrap your gifts or go rustic with some brown paper and twine.

6: Meal Planning Or No Planning

When it comes to holiday food, you can plan as much or as little as you like. Setting a meal plan will stop you from buying unnecessary groceries, minimising overspending.

Or, throw the plan out the window completely and ask your guests to simply bring a dish with them. The surprise of what kind of food you will receive is part of the fun!

Remember that you don’t have to invest in fancy treats either, you can make or bake your own budget friendly options that will probably taste better anyway!

7: Minimise Travel

Christmas Day can be hectic when you are trying to visit multiple households. Take a step back and look at what you could do to minimise the travel. Could you all meet somewhere central for a blended Christmas celebration? Or maybe visit one relative this year and save the others for next year, taking turn about.

Flights are notoriously expensive over the holiday period, as is accommodation. Perhaps you could plan to have a small family Christmas at home and then visit your relatives for a mid-winter Christmas to save on travel costs.

8: Cut Discretionary Spending

Take a look at your monthly expenses to see if there is anything you can trim over the holidays. For example, if you are a rugby fan, you might be able to pause any Sports subscriptions until the season starts again, or pause other services you won’t be using over the summer.

If you have family coming to stay, look at ways you can share expenses so that no one person has to cover the cost of everything.

9: Put Money In

Look for ways that you can inject money into your budget, rather than taking things out. You could potentially sell unwanted items or things from your garden, rent a room if you have extra space, or even Air BnB out your house if you are going to be on a summer holiday.

10: Examine Your Mortgage

One of the biggest holiday expenses you are likely to have will be your mortgage repayments. So, it’s worth exploring whether or not you can save some money there. The best way to do this is to have a chat with a mortgage broker, like the trustworthy team here at Mortgage Suite.

We can explore all the different options available, like refinancing, securing a different interest rate, restructuring your borrowing, or switching lenders. Any of these options could potentially create savings for you.

So, why not get in touch with our team now for an obligation-free chat? Book a time to speak with us now.

Are Interest Only Loans A Way To Save Money On Your Mortgage?

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Are Interest Only Loans A Way To Save Money On Your Mortgage?

As we all watch mortgage rates climb higher still, you’d be forgiven for trying to find ways to save some money each month.

There is only so far budgeting and cutting out luxuries will get you.

Sometimes, you might feel like a more drastic saving plan is needed.

Part of that exploration might include looking for ways you can save on your mortgage. Recently, we’ve had some queries about interest only loans so thought we’d provide greater detail about what they are along with some ways you might be able to save money on your mortgage.

 

What Is An Interest Only Loan?

Well, kind of like the name sounds, an interest only loan is a type of mortgage where you only make payments towards the interest portion of your home loan. You don’t make any repayments towards the principal portion of the loan. For this reason, interest only loans are for a fixed term and are usually approved for no longer than five years.

They also carry a large number of restrictions due to the intensified risk of debt and house prices in the current market. That means lenders need a really justified reason for allowing interest only lending right now, and some don’t even offer it

 

Can You Save Money With An Interest Only Loan?

So, can this type of loan save you money?

Well, it might seem like they are an option to reduce costs in the short term as the actual payment amounts will be lower. However, you will actually end up paying more in the long term as the interest is always calculated based on the principal amount of the loan. So, because the principal is not reducing as it would in a standard mortgage repayment, you will end up paying more interest over the term of the loan.

Usually, an interest only loan is more suited for property investors who may be able to claim some of the interest as a tax deduction. But, they can also be beneficial for first home buyers who are looking to make the first year of repayments more manageable or homeowners who are looking to sell their property soon.

 

Other Ways To Save On Your Mortgage

If an interest only loan is not necessarily the answer, what other ways are there to potentially save on your mortgage costs? Well, here are some suggestions:

Talk to the Experts

The first piece of advice we can offer is to talk with a respected mortgage broker like the team here at Mortgage Suite. That way, we can give you tailored advice based on your individual financial situation. This includes chatting about your current mortgage (if you have one) and what your future plans entail. Then, we can give you informed advice about the best options for you and your family.

 

Shop Around

Sometimes a different lender might be able to provide you with a different rate or a better incentive than your current lender. So, it pays to shop around to see what kind of deal you can get. A mortgage broker can help you do this and can also recommend the best potential option for your individual needs.

 

Negotiate

There is no rule to say you need to take the first interest rate offer you are given! You can try to negotiate a better rate or have your mortgage broker negotiate on your behalf. Often, if you have a good credit rating and strong financial history you may be able to secure a better deal.

 

Fixed or Floating

As we’ve discussed in the past, there are merits and drawbacks for both floating and fixed options. Fixed mortgage rates give you consistency and certainty about what your repayments will be, this can help you to budget better. However, floating rates can work if you have a variable income where you might be able to put more of your mortgage some months or if you want to capitalise on any changes in the market.

 

Loan Structure

The structure of your loan can sometimes be modified to create a better deal for your current situation. That can include modifying the term of it, splitting it into different portions with different interest rates, or even splitting some between fixed and floating rates.

There is not one set structure that suits everyone, so have a chat with your mortgage broker about what might be the best option for you.

 

Use Offset Accounts

Some lenders offer offset accounts as part of your mortgage package. Basically, any money you have in those accounts is offset against your mortgage balance which can reduce the amount of interest you need to pay. Double check with your bank if this could be an option for you.

 

Be Mindful Of Fees

Make sure you are aware of any fees associated with your mortgage and try to minimise incurring any. Some lenders will charge a fee if you make additional repayments or if you break a fixed term rate. There can also be penalties if you miss a payment, so it always pays to be proactive and contact your bank if you think you won’t be able to pay on time.

 

Regularly Review

Take the time to periodically review your budget and financial goals. Then, chat with your mortgage broker to ensure that they are in line with your current mortgage structure and adjust your strategy if your income, expenses or personal circumstances have changed.

 

Could You Be Saving Money?

The Reserve Bank is predicting that pockets of household financial stress are likely to grow in the medium term due to rising debt servicing burdens. Loan arrears have been steadily increasing in the past year, but most households have been able to manage to date by cutting discretionary spending.

What is noticeable though, is that mortgage holders have been missing repayments on other debt at a greater rate, suggesting that there are debt servicing strains out there. [source]

So, it is only natural that mortgage holders might be seeking ways to save money as 2023 comes to a close. If that sounds like you, then we’d love the opportunity to chat about how we might be able to help. Get in touch with the Mortgage Suite team today for an obligation free discussion about what 2024 could look like for your mortgage.

 

The Tricky Job of Reducing Inflation

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Reducing inflation

It’s common knowledge that inflation has been too high for too long in NZ.

And we’ve heard all the experts telling us that it’s a really bad thing.

But, why is that?

How does inflation have a vice-like grip on our economy right now and why has it not gone down despite interest rates sky rocketing and households feeling the pinch?

Well, let’s look at that question now and explore how tricky the job of reducing inflation seems to be.

 

Why Is It Bad To Have High Inflation?

In New Zealand, the target inflation rate is between 1 – 3%. As of October 2023, the current inflation rate is sitting around 6%. Clearly, we are quite far away from the target window.

So, why is it such a bad thing for inflation to be high?

Well, there are a number of reasons why we can see the Reserve Bank working so hard to bring the rate down. These are a few of the main ones:

Reduced purchasing power

High inflation takes away some of the purchasing power of our dollar. If prices continue to rise month on month, like we’ve seen recently, people find it increasingly difficult to afford the same amount of goods. Effectively, the money you earn will buy less than what it did before. This can reduce your standard of living and quality of life.

Economic uncertainty

It’s not only individuals that are impacted, businesses also feel the pinch because high inflation leads to economic uncertainty. Consumers have less money to spend, so they delay making purchases other than essential items.

It is hard for businesses to operate under these conditions as they need people to buy their products in order to keep the doors open! When businesses have fewer people spending with them, they can’t plan for the future as they don’t know when the funds will roll in again. This results in economic instability for the whole country.

Higher interest rates

High interest rates are at the front of every mortgage holder’s mind. When inflation is high, the Reserve Bank tries to combat that by raising the OCR. As we’ve learned in the past, the OCR is one of the main considerations for setting mortgage rates. When the OCR goes up, so do interest rates.

Higher interest rates can deter borrowing and spending as everyone is focused on having enough money available to keep a roof over their heads. This lack of money circulation negatively impacts the country’s economic growth and makes businesses hesitant to hire more people.

Basically, there is less money circulating through communities as everyone is prioritising servicing their mortgage. Around these times, you might see your favourite small businesses closing as it is no longer financially viable to stay open with people spending less.

 

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

Now we know why high inflation is a bad thing and why the government and the Reserve Bank are working hard on reducing inflation. But, why is it taking so long?

Reducing inflation at any speed relies on:

  • Economic conditions: Inflation reflects supply and demand dynamics. If demand is high and supply is low, it can take longer for inflation to come down. We are seeing this in the marketplace as consumer spending is still high, partly as a result of migration increasing in the aftermath of Covid restrictions lifting.
  • Monetary policy: As we know, the Reserve Bank are doing their part to reduce inflation by raising the OCR. However, it takes time for those changes to have an impact. Because many NZ mortgages are on fixed term rates, the pain of increased mortgage rates can only be felt when those fixed terms expire and a new interest rate must be fixed.
  • Expectations: Inflation expectations can impact the rate at which inflation reduces. If people expect inflation to persist, they may request higher wages. When businesses pay more wages, the cost of goods has to remain high to cover these costs. Suddenly, you have created a self-fufilling cycle of inflation. Only when the expectations change can inflation be reduced.

 

How Long Will This Current Situation Last?

Economists are confident that the high inflation war can be won. But, it’s not something that will happen overnight. As we know, the OCR remains at 5.5% after the Monetary Policy Committee chose not to increase it on 4th October. This is because interest rates seem to be constraining economic activity and are starting to reduce inflationary pressure as required [source].

However, we aren’t out of the woods just yet. “Kiwibank says the RBNZ’s plan is simple: lift interest rates to a point where they hurt, and hurt a lot, and then wait for inflation to be stifled and restrained to something more stable, like 2%.” [source].

With inflation currently around 6% we have a long way to go. “To tame the prickly inflation beast, monetary policy needs to be left at restrictive levels, for longer. The RBNZ notes ‘a prolonged period of subdued activity is required to reduce inflationary pressure,’ says Jarrod Kerr, Kiwibank economist [source].

The good news is that the probability of further OCR hikes has reduced. It might be that the Reserve Bank has done enough to date to turn the tables on inflation. If all goes according to plan, inflation will reduce in the coming months and they can look to move the OCR down with more favourable borrowing conditions appearing in late 2024 or 2025.

However, this will depend on whether a further OCR hike happens in the upcoming 29 November 2023 review. So, at this stage, we will await that announcement before making further predictions.

 

Our Advice

In this uncertain market, it is still our recommendation to seek advice from an experienced mortgage broker before making any decisions about your current mortgage or any potential borrowing.

Here at Mortgage Suite, we specialise in giving personalised financial advice tailored to your individual situation and the current circumstances in the mortgage market. We’d love to have the opportunity to discuss your mortgage needs as we might be able to create a better structure for your current situation.

Chat with our team to find out if that’s the case now.

How Long Should I Fix My Mortgage For?

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How Long Should I Fix My Mortgage For?

Why Do Mortgage Rates Keep Going Up?

If you’ve been keeping on top of the announcements by the Reserve Bank, you’ll know that the Official Cash Rate (OCR) has remained at 5.5% since 24th May 2023. And as we’ve previously learned, the OCR is a large player in dictating how interest rates will be set.

So, if the cash rate hasn’t moved since May, why do mortgage rates keep increasing?

Well, a lot of it is down to the cost of doing business. BNZ has quoted, “The cost of funding, which is predominantly determined by the rates banks can borrow overseas, has been increasing and this increase is being passed through to interest rates.” [source]

This sentiment has been echoed by the other main banks in NZ, with collective statements insinuating that “the OCR was a big driver of interest rates but there were other things that played into it, including what banks were paying depositors, as well as international markets and swap rates.” [source]

However, with the cost of living continuing to climb and banks recording record profits, is it fair to continue pushing mortgage rates up? Some economists think it isn’t and are calling for banks to reduce their interest rates. We’ll have to watch this space to see if their recommendations are taken on board by the big four banks!

What Options Are There?

As we’ve previously discussed, you have two main options for repaying your mortgage. You can lock in a fixed interest rate or you can choose a floating rate.

These are the most common options available to borrowers:

Floating

If you like the flexibility of making lump sum payments on your mortgage or you are happy to ride the wave of fluctuating interest rates in case it changes in the borrower’s favour, then a floating interest rate could be the right option for you.

Floating rates are traditionally the highest of all mortgage rates, but you aren’t locked in at a set rate so you can sometimes capitalise on interest rate reductions. As of 11 September 2023, current floating rates are sitting around 8.00%.

Fixed

If you prefer the security of knowing what your repayments are going to be each month, then a fixed term interest rate is for you. These are the most popular terms banks offer:

  • 6 months
  • 1 year
  • 18 months
  • 2 years
  • 3 years
  • 4 years
  • 5 years

Depending on the market, your current situation and future plans, any one of these fixed term options could be the right choice for your family.

How Long Should I Fix My Mortgage For?

As we have already mentioned, choosing to fix your mortgage allows you to budget and plan with set repayment rates. This is attractive for many families as they know what to expect each month.

So, if you do choose to fix, how long should you fix for?

One year mortgage rates have always been the most popular term as it is long enough to budget for, but not so long that you might miss potential savings should rates decrease. However, two year rates have been rising in popularity recently, and three year rates are becoming less attractive to borrowers.

As always, four and five year fixed terms will get you the best rate in the current market. Though it is not always wise to fix for that long when rates are as high as they are currently. It could mean you get locked in at a premium rate and pay more than you need to if rates drop within your fixed term.

Unfortunately, there is no one fixed term that will suit every family. So, it is recommended that you discuss your options with a mortgage broker, especially in the current climate.

Will The Rates Go Up Or Down in 2024?

Last month, economists were predicting that mortgage rates would begin to decrease in 2024. Yet now, they are not so sure. With a deficit in the government’s numbers and global markets feeling the pressure, those decreases may not happen as soon as we’d hoped.

It is thought that “the deficit blowout could cause a bit of upward pressure on interest rates”. Plus, we also have to factor in “worries about inflation next year in the United States.” The USA’s economy has a big impact on how wholesale interest rates are set. [source]

At this point, the direction in which interest rates will move is uncertain. It may become clearer after the election takes place in October. So, in the meantime, we recommend that you seek expert advice from a mortgage broker before making any final decisions.

Why Use A Mortgage Broker?

Why do we recommend that you chat with a mortgage broker? Well, as trusted financial advisors, mortgage brokers, like the team here at Mortgage Suite, live and breathe the mortgage market on a daily basis. That means we understand the market intricately and can make objective recommendations based on your circumstances and the current market conditions.

It’s natural to worry about your mortgage right now, but we want to take that worry away. So, chat with our team today to see what options are available to you in terms of mortgage rates and terms. Contact us now.

What Is Inflation And Why Does It Push Interest Rates Up?

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What Is Inflation And Why Does It Push Interest Rates Up?

We have heard an awful lot about inflation in the last few months.

But what exactly is it and why is it having such a big impact on mortgage rates?

We’ll explore that questions and what’s been happening in the world of finances now…

What Is Inflation?

We’ve all heard the word inflation before, and know that it can have a big impact on the general economy. But, what is inflation actually?

Well, inflation refers to the general increase in the prices of goods and services within an economy over a period of time. When inflation rises, each unit of currency buys fewer goods and services than it did before. In other words, the purchasing power of money decreases.

Inflation is typically measured as an annual percentage rate, calculated by considering the percentage increase in the average price of certain goods and services over a specific time period. The Reserve Bank closely monitors inflation because it significantly impacts the economy.

Sustained high inflation can put the country’s currency and financial system at risk. This is why The Reserve Bank and policymakers aim to maintain stable and moderate levels of inflation to support a healthy economy.

How Does Inflation Impact The OCR?

As we’ve already learned in previous months, the OCR has a flow on effect when it comes to setting mortgage rates. You can read more about that here. But, if we take a step back from that, inflation is one of the factors that the Reserve Bank consider when setting the OCR.

Here’s how it can have an impact:

Targeting

The Reserve Bank operates under an inflation targeting framework. This means they set a specific target range for the inflation rate and adjusts their monetary policy tools, including the OCR, to achieve that target. In New Zealand, the target range for inflation is typically around 1-3%.

Rising OCR

If the Reserve Bank observes that inflation is rising and is projected to exceed the target range, it might respond by raising the OCR. By increasing the OCR, the RBNZ makes borrowing more expensive for commercial banks, which can lead to higher lending rates for consumers and businesses.

In theory, this will reduce spending and borrowing in the economy, helping to slow down demand and moderate inflationary pressures.

Falling OCR

On the other hand, if inflation is below the target range or if there are other economic factors causing a slowdown, the Reserve Bank might lower the OCR. Lowering it makes borrowing cheaper, encouraging consumers and businesses to spend and invest more. This increased economic activity can help boost demand and bring inflation closer to the target range.

Expectation

Decisions regarding the OCR also depend on inflation expectations. If people and businesses expect inflation to increase, they might adjust their behaviour, such as raising prices or negotiating higher wages. These actions can contribute to higher inflation. The RBNZ takes these expectations into account when setting the OCR.

Economic Conditions

In addition to inflation, the OCR also takes into consideration other economic conditions, such as employment levels, economic growth, and global economic factors. These conditions can influence the Reserve Bank’s decisions about whether to raise, lower, or maintain the OCR.

Inflation + OCR

Overall, the relationship between inflation and the official cash rate is based on the Reserve Bank’s goal of maintaining price stability and ensuring that inflation remains within the target range. The OCR is a key tool used to achieve this objective by influencing borrowing costs, spending, and investment in the economy.

As we know, the OCR is a big driving factor in determining mortgage rates. So, that is how inflation is having a big impact on the current interest rates.

What’s Been Happening?

Inflation Watch

Now that we know a bit more about inflation and how it can impact our economy, have the Reserve Bank’s actions had the desired effect so far?

Unfortunately, inflation still remains stubbornly high at 6% and Westpac economists expect it to remain elevated over the coming year. That will mean continued pressure on household budgets. The Reserve Bank had paused its monetary tightening policy, but a final OCR rise could potentially be on the cards later in the year.

For all of us trying to buy groceries and pay our mortgages, this isn’t necessarily good news. But, only time will tell when it comes to mortgage rates. With uncertainty in the market, it is always advised to speak with an expert mortgage adviser before making any decisions regarding your mortgage.

Housing Market

Experts predict we may be nearing the bottom of the housing market with the rate of decline dropping for the fourth month straight.

“The QV House Price Index for July shows the average home dropped in value by 1.5% nationally over the July quarter, which is a smaller rate of decline than the 1.8% in June, and considerably lower than the 3.5% and 3.4% quarterly declines in April and May respectively. The national average now sits at $888,999. That figure is now 10.2% less than the same time last year, but just 0.3% lower than at the end of June” [source].

What does that mean? Well, house prices may start to even out soon. So, it is wise to take expert advice before making any moves in the property market.

OCR Forecast

Economists are forecasting that the OCR will remain high into 2025, potentially sitting around the 4% mark. This is due in large part to increased immigration numbers after Covid.

It’s predicted that the economy will “flirt with negative growth between now and 2024… Gareth Kiernan, Infometrics chief forecaster, says be it a continued slowdown, a double-dip recession, or any other description, the economy is still going to look and feel weaker throughout the rest of this year and into the next.

That’s the price we’re paying to get inflation under control and put the New Zealand economy on a more sustainable path.” At least he says, the country is now seeing the effects of the tightening in monetary conditions coming through.”

While this does not promise short term relief from mortgage rates, we are starting to see signs that the OCR hikes are having the desired effect. So, it will be about weathering the storm in the coming year, and we can help you do that here at Mortgage Suite with expert financial advice.

Contact our team today with any questions you have about your mortgage or current rates.

The Value Of A Mortgage Adviser In Hard Times

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The Value Of A Mortgage Adviser In Hard Times

It’s no secret that times are tough right now. Most families are really feeling the pinch with living costs dramatically rising in the last year.

And, don’t get us started on the interest rates!

In tough times, it is important to lean on the knowledge of experts. Right now, a mortgage advisor is one of the best experts you can engage.

Why is that? Read on to find out the answer and to see what is currently going on in the world of finance.

The Value Of A Mortgage Adviser In Hard Times

When the economy feels like it is in freefall, interest rates are up, and a lettuce costs more than $6 at the supermarket, it can be hard to stomach. That’s where the support and advice of an expert can be a welcome relief.

Here’s how a Mortgage Adviser can help during tough economic times:

Financial Assessment

A mortgage adviser can help you assess your current financial situation, taking into account any changes or challenges brought about by economic conditions. They can review your income, expenses, and existing debts to determine the feasibility of obtaining or maintaining a mortgage.

They can then provide informed advice about ways you might be able to save in some areas to ease the pressure you are feeling.

Mortgage Options

An adviser can provide an overview of the mortgage options available to you in the current economic climate, whether you are seeking advice on new lending or your existing mortgage. They can explain the various types of mortgages available, the impact of current interest rates, and the terms of each lending option, plus help you understand which is most suitable for your circumstances.

Market Knowledge

A key part of a mortgage adviser’s job is to stay updated on the local real estate market and economic trends. They can provide insights into market conditions, property values, and mortgage lending practices during all economic times. This knowledge can help you make informed decisions regarding buying, selling, or refinancing property.

Budgeting and Affordability

During challenging economic periods, it’s essential to create a realistic budget and assess the affordability of your current mortgage or any future borrowing. A mortgage adviser can help you evaluate your income, expenses, and mortgage repayments, taking into account potential fluctuations in income or interest rates.

By having a total understanding of your financial commitments, they can provide informed advice tailored to your personal situation. That will result in a budget that aligns with your financial situation and long term goals.

Negotiation and Support

When negotiating mortgage terms or dealing with financial institutions, having a knowledgeable adviser on your side can be advantageous. They can help negotiate interest rates for new or existing lending, loan terms, and repayment options on your behalf, ensuring you secure the best possible deal for your personal circumstances.

Risk Mitigation

Tough economic times often bring uncertainties and risks when it comes to your mortgage and other finances. A mortgage adviser can help you understand the potential risks associated with your mortgage, such as changes in interest rates or job security.

They can assist in developing risk management strategies, such as exploring fixed-rate mortgages or different loan structures to provide stability and peace of mind.

Call In the Experts

As you can see, there are plenty of benefits to working with a mortgage adviser, regardless of what the economy is doing. But, it is important that you work with one that you can trust.

The team here at Mortgage Suite would love the opportunity to advise and support you on any lending decisions. Whether your fixed term rate is coming up for renewal, you are having trouble with your current repayments, or you’d like to explore new lending options, we are here to help.

Chat with our team today!

What’s Happening In July?

OCR On Hold

As suspected by many financial experts, the Reserve Bank announced on 12th July that the OCR would be held at the current rate of 5.5% and expects to keep it at that level for some time.

So, what does it mean for mortgage rates?

Well, we are unlikely to see much change this year. However, predictions are that rate cuts could be seen as soon as the first quarter of 2024. “Barclays expects 25 basis point cuts at all the meetings in the first six months of 2024, with the cash rate reaching 4.75% by May 2024. [source]”

“ASB is expecting inflation to fall back into the 1-3% target band in the second half of 2024, fairly similar to the RBNZ’s view. [source]” “Corelogic suggests mortgage rates appear to be at a generalised peak, and this will allow households to quantify their ‘worst case’, with some starting to make property decisions again. [source]”

Again, it is a case of watch this space about the specifics, but based on the current information, it seems interest rates shouldn’t go much higher than they currently are. As always, we would definitely recommend consulting an expert financial adviser before making any moves when borrowing or refixing. Reach out to our team for helpful advice at any time.

The Item We Won’t Compromise On

There’s no denying that most families are tightening the belt on their finances and discretionary spending. But, there is one thing that we Kiwis are not prepared to let go of just yet.

And that is a well-brewed cup of coffee!

Households are not spending on the big items currently, but they are willing to spend on the smaller things in life. Spending at cafes, restaurants and bars lifted by 4% over the June quarter. So, if you still stop in for the occasional barista-brewed cup of joe, you are not alone!

Get in touch with the Mortgage Suite team now if you’d like to work out whether you could fit more coffees into your budget!

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