We have seen the OCR drop this year and some banks have responded by decreasing their floating rate slightly but with most increasing the 2-5 year fixed rates. This has left many people wondering what mortgage rates will do.
At iLender, our mortgage brokers predict rates will move upwards in 2017, but not by much. Below we’ll have a look at some of the contributing factors.
Banks Incurring Losses
Banks in New Zealand are virtually governed by their Australian parents (or get their money from Australia). As a result, Australian regulations regarding minimum capital adequacy standards will require banks to hold onto more capital. Banks can achieve this by increasing the appeal of term deposits. This can be seen in action with current term deposits of 3.6% available for the first time in years. This means that if banks pay more for deposits they must charge more to borrowers.
Profits are made by borrowing cheap and selling dear. With deposit rates moving towards 3.5% and lending down to near 4.5%, the bank’s margins are tightening. This means banks are making less money, which is reflected by the lower profits recently reported by banks. This translates to job losses, branch closures and higher interest rates charged to borrowers.
Broader Economic Activity
Global economies (like the US) are currently doing well. To stimulate growth in NZ, the Reserve Bank lowers rates. Once growth occurs and/or if there is a possibility of a housing bubble, the Reserve Bank is less inclined to drop rates further. We are beginning to see this strategy come into effect now, meaning we shouldn’t expect any more cuts to the OCR in 2017.
Lower rates may mean there’s less room to negotiate a deal. Banks have been giving away thousands to attract customers, with many now insisting on any inducement being repaid if the loan is closed within a short period of time.
The Bank of New Zealand, for example, has up to a four-year ‘lock-in’ period for cash incentives. These incentives have been the ‘norm’ throughout 2016, but should not be expected to go into the future. Even if the OCR drops, don’t expect the full drop to be passed on.
Recommendations for Borrowers
Our view is that mortgage rates will rise in 2017, but not by much. There are no signs on the horizon of the seesaw rate fluctuations we saw in the late 2000’s. If possible, we suggest fixing 3 to 5 years in the 4% range and floating some to repay the capital debt as soon as possible. Meet with a mortgage broker to discuss strategies to get mortgage free faster.
We predict property will continue to be a great investment in New Zealand, while we can provide a range of bank, non-bank and short-term financial solutions to help you achieve your property goals, and even help get mortgages for people with bad credit. The simple economics of supply and demand dictate that property will hold up sell in the coming years.
As always, we are available to discuss individual situations for property investors and first home buyers. Remember that while the banks will look after their own interests, we’ll work to get the best result for you. Get in touch with one of our friendly mortgage brokers online or by calling 0800 004 098. Have a great Christmas and New Year.