Mortgage rates may have hit their lowest point, with economists saying it is unlikely that they will drop much lower than they already have – meaning borrowers will need to get in fast if they want to take advantage of a cheap home loan.
Rates have been dropping steadily over the past 18 months, driven in a large part by the Reserve Bank’s series of OCR cuts over the past year. Floating rates fell quickly after the August cut of -0.50, and have crept steadily down despite no changes since.
ASB senior economist Chris Tennent-Brown says we can likely expect at least one more OCR cut in 2020, with an OCR floor of 0.75%. However, he says there is increased “upward pressure” on interest rates courtesy of rising global rates, recalibrating market expectations and new capital requirements for banks. As such, he says borrowers will need to plan for higher interest rates in the long-term, even if they manage to secure a low rate today.
When it comes to working out your mortgage rate strategy and choosing between a floating or fixed rate, Tennent-Brown says borrowers need to think about how much change they would be able to weather.
“At this juncture, we think most mortgage interest rates won’t move much lower than they are now,” he explained.
“Borrowers can currently obtain some certainty and a significantly lower rate by fixing their mortgages. While the future is inherently uncertain, our forecasts for carded rates suggest fixing at the lowest rates on offer then subsequently rolling short terms (e.g. 1- or 2- year fixed rates) is likely to be the cheapest option over a 5-year time horizon.”
“Just remember, the ‘best’ mortgage rate is only known in hindsight,” he added.
“On top of trying to minimise interest payments, a good mortgage strategy also needs to take into account an individual borrower’s cash flows, tolerance for uncertainty, and the ability to deal with changes in future mortgage payments as interest rates change. Borrowers’ financial circumstances can change too, and this needs to be taken into account.”
“It is important for borrowers to weigh up their own priorities, and make the mortgage choice that looks best aligned with their needs.”