Last week the Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 2.5 percent. The reasons for this relate to the weak economic growth globally and the softened NZ economy.
In the press release with the OCR announcement the Reserve Bank Governor Graeme Wheeler stated that CPI inflation is below the 1 to 3 percent target range but the inflation rate is expected to move inside the target range from early 2016.
He went on to highlight house price inflation in Auckland remains high, posing a financial stability risk. Residential building is accelerating, and recent tax and LVR measures are expected to reduce housing pressures. But he also commented that “There are some early signs that Auckland house price inflation may be moderating”.
The Reserve Bank indicated that current interest rate settings should assist the average inflation to return to the middle of the target rate of 1 – 3% however they indicated that the Bank will reduce rates if circumstances warrant and will continue to watch closely the emerging flow of economic data.
This means that short term we expect at least some interest rates to drop. Medium term they could hold their own or increase. Already some lenders have reduced some of their fixed terms with the variable rates on existing lending set to drop later this month. The most competition in pricing seems to be moving off the fixed 1 year and on to the fixed 2 year rates.
The time is certainly right to secure some of the lowest interest rates on record. But it’s important to note that a sound strategy would outweigh lower interest costs. For example – maintaining loan payments at the same level when coming off a higher interest rate would reduce the loan term significantly thus reducing the overall cost of the mortgage.
Having a loan that has the flexibility to increase payments to clear the loan quicker or using a revolving credit may reduce interest charges and thus the overall cost of the home loan.
The right structure will almost always end up being the cheapest loan. But what exactly the right structure.
Fixed loans offer security and lower rates but little flexibility to accommodate changes in circumstances. Floating loans offer flexibility but uncertainty for budgeting purposes and comparatively higher interest rates.
Revolving credit type loans are technically the fastest way to pay off your home loan but research shows only 15% of the population is able to work it so that is effective in reducing the overall cost of the loan.
Offset Accounts can provide further advantages and flexibility but often come at higher interest rates and account fees.
A mixture of the above types of loans can provide flexibility, security and great pricing. But what type and mix is best suited?
Structure of lending should always be done with a mortgage advisor. They are able to demystify each product and match your financial profile and with the most suitable structure. They are able to help navigate and interpret the financial climate allowing you the best options no matter what the market expectations are.
