The most important rule is to get decent advice. Having the right mortgage structure will save you thousands and reduce your risks if something goes wrong.
A mortgage is possibly one of the biggest financial commitments you will make and it can easily go wrong – yet there tends to be a naive singular focus on rates. Would you trust anyone with your biggest purchase? Yet so many people do!
The number of people that have been poorly advised and are now suffering from high interest rates or poorly structured mortgages on Investment Properties is frightening! No bank is immune, but in my mind one of the worst offenders has been Kiwi Bank.
I like Kiwi Bank. They have brought a whole new level of competition to the market. But I question how well their staff are equipped to give advice and the lunacy of promoting cheap 5 year rates near the top of an interest rate cycle, especially when they did not provide adequate advice to clients about the risks.
What is the best mortgage strategy for now?
Mortgage rates are forecast to bottom out around June 2009. Short term rates could get as low as 5.50% with longer-term rates getting down to around 6.00%-6.50%. In my opinion, that means taking a six month fixed rate now at 6.50%-6.90% is the best option. In six months you can then look to split your mortgage into multiple fixed rates and spread them over 3-5 year fixed terms. Long-term rates are stubbornly high at the moment, but competition will most likely bring them down as customer demand moves to longer term rates.
How low can rates go?
On the positive side – limited availability of credit (aka 20% deposits) and excess property stock means that the Reserve Bank does not have to worry about house price inflation for a while yet. We suspect Kiwis will also use low interest rates to pay-off debt rather than it kick starting another round of buying. These will collectively support lower interest rates.
Internationally, interest rates are very low. Even a rate of 4% for investors (alongside a low NZ dollar) will look attractive. That said, I cannot see short-term lending rates getting below 5.50%.
An Official Cash Rate of 4% is already priced into long-term interest rates, but there are still two things to happen (1) the OCR may go lower than 4% to compensate for higher bank funding costs, and (2) banks are holding up long-term margins whilst there is a lack of competition for long-term rates. In theory, the 5 year rate should be about 0.70%-0.80% above the 1 year mortgage rate. If the 1 Year Rate gets to 5.50% then we might see a 5 Year Rate approaching 6.00%. Anything below 6.50% for 5 years will be great value.
A combination of fixed terms should allow customers to average down their overall mortgage rate to around 6.00% at the same time as building some long-term rate protection.
About Us
Squirrel is an independent Mortgage Broking, Investment and Insurance business. John Bolton is a former General Manager at ANZ National Bank and has held senior positions across a number of banks. We know the mortgage market inside out and back to front.
We make our money from writing new mortgages. If this blog has been useful, consider using us for your next mortgage or even for your fixed rate rollover. We can review your mortgage structure and do your rollover for free. We are paid $150 by banks to help clients re-fix their mortgages.
You can call us on 0800 212230 or drop me an email john@mysquirrel.co.nz
