Good news for homeowners: Loan rates to remain low

Additionally, last year's changes to the loan to value (LVR) ratios have meant some buyers are struggling to get finance. Photo / 123RF

Good news for home buyers this summer is that mortgage rates are remaining low and house prices are falling. Vince Clark, ASB's head of product portfolio management, says with Auckland house prices cooling, investors are likely to be less active in purchasing new property and, in some circumstances, more inclined to sell to consolidate any capital gain.

"The extent to which this creates opportunities for other types of borrowers — such as first home buyers — will depend largely on the price expectations of property vendors in the current Auckland market and their willingness to negotiate," he says.

But banks may be more cautious with lending as their profits fall and the cooling property market increases the risk of borrowers defaulting.

Additionally, last year's changes to the loan to value (LVR) ratios have meant some buyers are struggling to get finance.

The changes mean most buyers need to front at least 20 per cent of the purchase price to get a mortgage, a big ask when the Auckland's average price is $1,038,722. And that's with a decrease in value of 0.6 per cent since 2016.

Good news for some
In October, HSBC launched a record low home rate of 3.87 per cent for an 18-month fixed term; but there were caveats. It is offered only for a limited time, borrowers must draw at least $500k, or have existing investments worth over $100k.

So while rates are hitting bottom, getting into that first home — especially in Auckland — remains difficult.

However, for those with an existing mortgage, the low rates are good news. Many borrowers snapped them up when their mortgages come up for renewal.

Indeed, average mortgage interest payments dropped from $283.70 a week to $250.80 a week year-on-year, according to Statistics New Zealand figures.

And experts agree that the low rates are here to stay in the short term at least.

The rates reflect loose monetary policy here in New Zealand and abroad, says Christina Leung, principal economist at NZIER.

"Very low inflation globally in the wake of the Global Financial Crisis has seen major central banks cut policy rates to historically low levels, and in some economies undertake quantitative easing.

"With inflation remaining contained here in NZ, we expect the Reserve Bank will keep the OCR on hold through to 2018. This should keep mortgage rates low in the short term."

She says the new Labour-led Government has indicated it will review the Reserve Bank Act, with the potential for additional targets such as employment to be added to the Reserve Bank's inflation target.

"Leaving aside this uncertainty over the Reserve Bank's targets, any big spending plans by the new Government also have the potential to boost inflation and in turn lead to higher interest rates, but any effects are likely to take some time to filter through the economy."

To get some perspective, 30 years ago, after the stock market crash, home mortgage rates were above 20 per cent.

2018 looking steady
Last month the RBNZ kept the OCR at 1.75 per cent. Acting Reserve Bank governor Grant Spencer said the bank incorporated preliminary estimates of the impact of new government policies in four areas: new government spending; the KiwiBuild programme; tighter visa requirements; and increased minimum wage. Bank forecasts show the OCR rising to 1.9 per cent in June 2019, three months earlier than its prior projection.

ASB's chief economist Nick Tuffley says interest rates have fallen back this year after they jumped late last year when Donald Trump was elected president of the United States.

Tuffley doesn't expect the new Government to have a dramatic impact on rates "unless they do something dramatic to the RBNZ".

"We have seen lower mortgage rates over 2015 and 2016 for fixed and floating rates. This was particularly the case for the long-term rates, as the current five-year rate is still at least 70 basis points higher than it was in mid-2016 (up until Trump got elected).

"During 2018, we would expect to see interest rates rise fractionally higher (25-50bp).

Overseas interest rates are likely to be grinding up slightly, which is one influence on local interest rates. However, more marked increases are likely over 2019 on the assumption that the RBNZ starts lifting the OCR that year."

Tuffley advises borrowers to be aware rates can move. "It is always prudent to make sure that the amount borrowed could still be serviced comfortably at higher interest rates without too much sacrifice."

He advises that when thinking about what length of term to choose, picking the cheapest term may not always be the best option over the longer term.

"There is usually a trade-off to consider between how much certainty you can get through fixing ... generally, you pay up to get certainty.

Fixing for a short term is often cheap, but if interest rates have lifted by the time the term ends, future interest rate costs will be higher and an opportunity to fix for longer at a good rate may be missed.

"But if the OCR is unlikely to move up for some time and interest rates don't move too much, shorter terms can end up delivering good value."

MORTGAGE TIPS:

As far as interest rates are concerned, often banks are prepared to be flexible based on a number of factors.
■ The amount of your deposit and how much business you have or are prepared to bring to the bank are taken into consideration.
■ Being willing to consolidate your financial services with the one provider as much as possible helps.
■ Talking to your own bank first makes sense. They should be in the best position to tailor a home lending solution to suit your needs.
■ It's not just about which bank has the lowest interest rate. Think about other products and services that are important to you such as online banking or branches and, most importantly, their reputation and customer service.
Source: ASB head of product portfolio management, Vince Clark