Where will interest rates go from here and what should you do?
The information below should provide some clarity on what the drop means and what may happen in the future.
We do love it when interest rates drop... As the cost of your home loan reduces you've got the chance to pay it off faster or use the extra available cash elsewhere. However, with most people on fixed interest rates the recent drop in the OCR won't provide them any immediate benefit. Remember that the OCR signals the price that the trading banks can borrow short term funds from the Reserve Bank. Therefore it only immediately effects the floating rate and any of you with floating loans will have noticed these have now been dropped by .25%.
So what about fixed rates?
We have mainly seen reductions in the 1 and 2 year fixed rates. This is because the short term cost of borrowing for the banks has decreased and the Reserve Bank has indicated that the OCR may fall again. The trading banks use complex calculations to work out what they believe their cost of money will be over those fixed terms, add their margin and set the rates accordingly. The key thing to note here is that commentary from a couple of the main banks suggests they've factored in another one or two drops in the OCR when setting their 1 and 2 year fixed rates. So these may not go lower than they are now if that is the case.
Something else to note with the short term specials is that the 3, 4 and 5 year fixed rates have barely moved, if at all. This is because the bank's see the cost of borrowing over the long term remaining pretty steady. A common mistake is to assume that a drop in the OCR will see a decrease in ALL fixed terms, the lack of movement in the long term rates this month proves the point that is primarily effects just the short term fixed rates.
Where to from here?
As I mentioned above, the Reserve Bank have indicated that there may be further drops in the OCR and the trading banks appear to be factoring this in to their interest rate calculations. If this happens we will definitely see further drops in the floating rate but may not see further large drops in the fixed term rates.
What you should do next
Anyone who follows my advice regularly will know that I believe in having the best loan structure and fixed rate to suit you personally. Everyone has a different risk appetite and long term financial plan. For that reason there is no single right answer on what to do next.
I would suggest that if you've got a fixed loan expiring soon then taking advantage of the low shorter term rates could be a good option but even more attractive to me is securing long term lending for 3-5 years for around 5.50% or below. Even if the short term rates were to tip a little lower it is hard to see you bettering a 5.50% average over a 5 year period.
It may also be worth looking at the cost of breaking your existing fixed rate and re-fixing. I'll cover that off in more detail on a blog soon.
As always I am happy to provide advice specific to your situation and negotiate with lenders to ensure you're getting the best deal. Email me personally by clicking this link and we can work with you to get the best deal from there.
I look forward to hearing from you soon
Cambridge, Matamata, Te Awamutu, Hamilton, Auckland