As we come out of Winter into Spring we always expect to see sunshine and an up-tick in the economy, but again this year that seems to be missing. Instead we are seeing wind and rain, and we’re still waiting for the long-awaited economic recovery too.
But the silver lining or good news for home owners is that we are likely to see interest rates drop again soon.
The Economy – So What’s Happening?
It’s interesting to see the correlation between how well the economy goes and what happens to interest rates. This is because the official cash rate (OCR) is used by the Reserve Bank as a tool to manage inflation. Of course, inflation increases when the economy is going well, but it’s generally not such an issue when the economy is doing badly – except it was last year.
So if we look at the economy at the moment it’s not doing very well and we are yet to climb out of the hole that we dug during our Covid response. During 2024 there was so much talk about waiting for 2025 which was touted as a year of recovery. But we’re almost three-quarters of the way through the year and we’re still waiting to see that recovery taking place.
It seems to have started in the regions with agriculture picking up and doing exceptionally well at the moment, but the major cities are lagging… and have not yet seen much more than the odd green shoot here and there.
There is more good news starting to dribble out and so people do have hope that we will start to see some growth before the end of the year – but there’s not much time left.
Maybe it’s not 2025 that’s going to be the year of recovery, but now we should be thinking of 2026? I’m sure we will look back at some point and then we can be the ‘experts’ but at this stage most economists are reluctant to make predictions.
What About Interest Rates?
So what does that mean with interest rates?
It’s been fairly well-flagged that we will have an interest rate drop in October but the question is how much will it be. Will it be 0.25% or 0.50%?
If the reserve bank want to give the economy a real kickstart, and many think they should, then a drop of 0.50% makes sense.
At the last OCR announcement in August, it was reported that two of the decision-makers wanted a 0.50% drop then, but we only got the 0.25% drop; albeit with talk of more to come. I guess in hindsight some of the questions that they will ask is did the drop in August achieve anything, or should they have gone for a bigger drop?
We all have our views on that – and we think many think that a drop of 0.50% then would have made more sense.
Talking Home Loans & Refixing
That brings us to what to do with any home loans that are due to be refixed.
For these we don’t have the luxury of hindsight and instead need to do what we think is the sensible thing now. Of course we can just refix or we can wait and there are a few things to consider:
The next OCR is the 8th October – so as we get closer to this date then things might become clearer and maybe the banks might drop rates again prior to the announcement like they did in August. It’s not long to wait now and so that might be a good option.
When do you need to refix by? We are suggesting that you leave the refixing as late as possible in the hope that rates might drop a bit more before you refix. This is the normal strategy when rates are dropping or expected to drop, so best to ignore those irritating messages from the bank that try to make you refix early.
Stick to your strategy – as mortgage advisers we believe that people should have a strategy to manage their finances and especially with the mortgage which is often quite a large financial commitment. How do you manage your loans to ensure that you have the best options that allow you to repay more when the rates drop, but not be forced into a situation where the repayments become unbearable when rates increase again. Do you have a strategy, and do you know what your bank allows when compared to other banks? Is it even a good idea to increase your mortgage repayments – READ THIS before you do anything.
Manage the risk – the risk is always that interest rates could increase, and while it seems unlikely at the moment it is still possible and you should never discount that possibility especially with the turmoil and uncertainty around the World in recent times. You should consider this when you are looking at what term to refix for too as you might not want to have all of your lending coming off fixed this time next year.
