Editorial: Breaking bad - low interest and the mortgage dilemma facing Kiwis

It's time to crunch the numbers as mortgage rates hit record lows. File photo / 123RF

EDITORIAL

Bank home loan rates have tumbled to new lows in the last week after the Reserve Bank cut half a per cent off the Official Cash Rate, dropping it to a record low 1 per cent. The move came as a surprise to many, as most analysts had been expecting only a cut of a quarter of a per cent.

Smart homeowners are now able to grab a rate of 3.69 per cent, fixed over a year, at nearly all the major trading banks with some suggestions the banks will go even lower for those prepared to negotiate with them.

But should you break your fixed-term mortgage to try and grab some of the action? Most likely, not.

Experts say only those within a few months of coming off their fixed term are likely to win by doing this. Breaking a fixed-term mortgage can be costly, as the bank has the right to charge you for doing so and those costs can easily outweigh the savings of a lower interest rate.

There are costs involved in breaking any contract. Firstly, you need the bank's consent. And if given, it would want any costs it has covered. New Zealand law requires banks to allow a mortgage fixed-rate contract to be broken but also limits them to only recovering costs, and not "profiting" from the transaction.

The good news is that many people are currently sitting on short fixed-term mortgages. Reserve Bank data shows, for owner-occupiers with a mortgage, $111 billion out of the total $131 billion in fixed-term loans is fixed for two years or less. Around $65 billion is fixed for a term of one year or less.

Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell

The Reserve Bank governor, Adrian Orr, has been confident in his assertions that the cut to 1 per cent will put more money in the pockets of mortgage holders. He said the Reserve Bank estimated the average saver would be down around $10 a week but the average borrower would gain about $40 a week.

There is also no rush to grab the low rate, with brokers picking banks rates could fall further as New Zealand heads into the competitive spring market, typically a time when banks launch special rates to entice people to switch providers.

Economists are also picking more cuts to the Official Cash Rate in the future as more clouds hang over the global economy, pointing to the potential for a recession. You would be hard pushed to find anyone who believes the Official Cash Rate will head back up any time soon, with talk of its staying lower for longer.

Of course, the cash rate is only one influence on fixed-term rates at the banks with banks also having to get funding in the international market and paying interest to secure local depositors' money.

Banks are also waiting to hear how much extra capital they will need in the future with the Reserve Bank due to announce its final capital policy decision in November. Some banks have warned the proposed capital increase will push up mortgage rates while other analysts have said it will not have that big an impact.

Now is always a good time to review your debts, and whether you're getting a good deal, but any big financial decision requires careful consideration before jumping in.