What to Consider When Interest Rates Drop?
The new OCR rates are set to be announced by the RBNZ on November 26 since the last cut on 9 October to 4.75%. With what is hoped to be a positive outcome for many in the industry, there is definitely more anticipation being shared among homeowners and homebuyers - with those asking the most important question - how low can the interest rate fall?
With what is hoped to be a significant reduction it's essential to consider the bigger picture when and if it does drop.
How is the Housing Market Affected by Declining Interest Rates?
Reductions typically revitalise the housing market by lowering monthly mortgage payments, making homeownership more attainable. In New Zealand, where the housing market is already competitive, more affordable borrowing can drive up demand, leading to raised property prices.
This surge can benefit existing homeowners looking to sell, but prospective buyers may face fiercer competition and rising costs.
Test Rate Reduction by Banks
If you are looking to buy a home the fall in interest rates may mean banks consider lowering their test rate to assess the eligibility of loans. These rates currently fall between 8.75% and 8.5%.
New Zealand’s main banks have all lowered their test rates. They are as follows…
- Westpac: 8.15%
- ANZ: 8.05%
- ASB: 8.10%
- BNZ: 8.5%
- Kiwibank: 8%
Concerns About Long-Term Affordability
While lower interest rates make home ownership initially more accessible, they can also contribute to long-term affordability challenges. As demand ramps up and property prices rise, first-time home buyers may find it increasingly difficult to enter the property market.
Additionally, the temptation to over-leverage—borrowing more than one can realistically afford—can lead to financial strain down the line. It is important to balance the short-term benefits of lower home loan rates with a clear understanding of your financial limits.
Short-Term and Long-Term Financial Impact
Consider all related costs such as application fees, valuation fees, and other administrative charges. These expenses can quickly add up, potentially offsetting the advantages of a reduced interest rate.
Property Investment
Lower home loan rates can be particularly enticing for potential property investors. Reduced borrowing costs can significantly improve your return on investment by lowering monthly mortgage payments and overall expenses.
Loan Conditions
While a lower interest rate is undoubtedly attractive, the small print can reveal stipulations that may not be in your best interest. For instance, loan term length can affect the total amount repaid. A shorter term usually means higher monthly payments but less interest over the loan lifespan, whereas a longer term reduces monthly payments but increases total interest costs.
Repayment Flexibility
Some loans offer the ability to make extra payments without penalty, allowing you to pay off your mortgage faster and save on interest. However, others may impose penalties for early repayments, which could negate some of the benefits of a lower rate. It’s also worth considering whether the loan includes options for repayment holidays or redraw facilities, which can provide financial breathing space in times of need.
Refinancing Your Mortgage
Refinancing can present considerable opportunities when mortgage rates drop. By locking in a lower interest rate, homeowners may substantially reduce their monthly payments and the overall interest paid over the life of the loan. This could provide additional cash flow for other financial commitments or investments.
What Actions Should You Take?
Assess your financial status to determine if refinancing or purchasing a new property aligns with your goals. Developing a comprehensive financial plan that anticipates fluctuations in interest will empower you to make better, more knowledgeable decisions. Finally, consult with a financial adviser to assess your financial status.
What Is the Future of New Zealand Interest Rates?
Trends suggest a period of lower rates, so it’s vital to consider potential shifts due to inflationary pressures or economic instability. Central banks might adjust rates in response to these variables, affecting borrowing costs. Staying informed about economic developments can offer valuable foresight for homeowners and buyers.
3 Interest Rate and Mortgage FAQs
What Will Mortgage Rates Be In 2025?
Rates are already below 6%, but hard to substitute here. While there is no guarantee OneRoof has forecasted that it may fall below 6% and even lower to 5%.
How Often Does The NZ Reserve Bank Review Interest Rates?
The OCR is reviewed by The MPC (Monetary Policy Committee) 7 times a year with a policy statement published 4 times per year.
Is It Worth Using a Mortgage Broker?
Absolutely! When you partner with a mortgage broker they take the time to understand your unique needs, navigate complexities, create tailored solutions and can streamline your home-buying journey. You can trust that the best strategies will be used to submit your application and increase your chances of securing approval. It’s also great to know that mortgage brokers here in New Zealand are paid a commission by the lender meaning services are free (*depending on the lender and product type).
A Partner in Your Financial Journey
Consulting with a mortgage broker or financial adviser can help you navigate the complexities and ensure you’re making a choice that aligns with your long-term financial goals. Book a FREE consultation with a Rapson adviser to discuss your goals and explore your options.