Movement on Interest Rates - Pricing

2 December 2016
While the Reserve Bank continues to lower the Official Cash Rate (OCR) last week we saw 2 banks increase their fixed interest rates.  Does this signal the end of the lowest fixed rates that we have seen and the start of the “normalisation” of interest rates in general?
 
In NZ Banks are required to have 70% of their funding from Domestic investors.  Problem is that lending rates are so low that NZ investors don’t want to put their funds in to Banks to have such a low return so they are looking elsewhere for better returns.  This has led to a shortage of Domestic funds.
 
Banks need to attract those investors by offering higher returns.  In order to keep sufficient margins between investment and lending, home loan rates have had to be increased and If investors continue to invest elsewhere, banks will be forced to source more funds from overseas resulting in further increases.  
 
So should borrowers fix or float their loans?  Here are the advantages and disadvantages of the different types of loans:
 
Floating/revolving credit/offset – these offer maximum flexibility.  Loan payments can be increased and lump sum payments can be made without any restrictions or risk penalties being applied.  This is suitable for those who will have lump sums available in the future or who may be selling a property to confidently know they will not be hit with any penalties. However floating loans offer the least amount of security against rising interest rates and, at this time, these rates are the highest rates.
 
Fixed short term (6 - 12 months).  This provides some short term security and the rates are lower than the floating.  This can be a good option for people who are undecided if they should fix or float. Or if they expect further funds in the short term.  However it provides only short term security.
 
Fixed medium term (18 months – 3 years).  These are amongst the lowest interest rates on offer and provide medium security.  However it reduces the flexibility to increase loan payments and pay lump sums on the loans.
 
Fixed loan term eg 4 – 5 years.  This provides the maximum amount of security and is a good option for people not intending on selling their home in the near future or will not be increasing their payments or paying lump sums.  This fixed term provides the least amount of flexibility.
 
Consideration could be given to a combination different types of loans.  Eg having a portion on floating to allow some flexibility and a portion fixed to offer some security.  
 
The structure of any loan depends not only on the interest rate offered but also on what the objectives and expected cashflow would be for clients both short and long term.  Clients need to be aware of the options and what best suits their needs.  They also need to be aware of the pitfalls of each option.  As such consultation with a mortgage Advisor is a great way to ensure the right decisions are made for the right reasons.    
 

Published In Whakatane Beacon

This post was written by

Trish Marsden - who has written 96 posts

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