If you’re looking at interest rates and have a loan coming up for a refix soon, you can understandably be quite confused as financial uncertainty continues and with the mixed messages that you’re hearing.
You’re listening to the radio and you hear that interest rates are likely to come down, and later you turn on the television and there’s talk that they won’t come down much more. If you’d read the last monetary policy report from the Reserve Bank, you would be equally confused as they gave different scenarios rather than an outlook as they typically would. Then there is all the information or mis information that you see on social media!
But you just need to look across at the USA and see the decisions that Trump seems to be making on the fly, and it’s putting a lot of the world economy on edge.
So what does this financial uncertainty all mean, and more importantly what should you do?
This is why we developed Kiwi Edition – to give you a little bit of information using a combination of common sense and logic, and to try and remove that financial uncertainty that makes decisions so hard.
I would stress that this is just an opinion, and you should never rely solely on this.
Kiwis Don’t Like Financial Uncertainty
When I look at the New Zealand economy, there are areas that seem to be doing well (such as the primary sector: farming, horticulture, fisheries, and forestry) and then there’s the rest of the economy which is really struggling. Areas like manufacturing and retail have been doing it extremely tough, but it also looks like the service sector as a whole is going backwards at the moment.
When we look at the economy and even some of the numbers that we’re seeing we should be concerned. It’s really not going great and we believe that the economy needs a bit of a boost in the very near future. Lowering of the interest rates to get businesses spending and consumers spending would certainly help.
On the other hand we have the Reserve Bank that is looking at data and inflation, and has inflation as one of its key concerns. There is a natural reluctance, therefore, to decrease interest rates as that could be seen as inflationary. But also, we know that the Reserve Bank is looking at some data which suggests that the economy (albeit small sections of it) are doing okay. Therefore they are probably not seeing the financial uncertainty and do question if there’s a need to reduce interest rates.
My feeling is over the next two to three months we will see that the economy is not growing and therefore will need an injection of stimulus, and the easiest way to do that is to reduce interest rates. I personally do not think that interest rates will be dropped significantly, but we could see one or two drops that might mean we’re seeing interest rates of 0.50% less than they are today.
The BIG Unknown!
The big unknown is not so much what happens in the New Zealand economy, but the effects from what’s happening around the world.
Not only do we have Trump, who seems to change tact quite regularly, but we have a lot of other economies that seem to be struggling, and then we have the unrest in various parts of the world which are causing concerns.
Refixing My Mortgage
Bringing that back to our personal mortgages and what we should be doing.
Firstly I’d say that interest rates at the moment are pretty good with mortgage lending below 6%, and there are some rates available under 5% too.
So as we review mortgages, we want to look at the loan structure and the efficiency.
What we need to look at is making sure that we are efficient with good competitive interest rates.
We need to eliminate any high-interest debt that we might have outside of the mortgage. Banks have a habit of giving personal loans that are pretty expensive even for those people with home loans, and many of the finance companies have high interest rates too.
In most cases, we are splitting the mortgage so that you have some on the shorter one and two-year fixed rates, and then a portion could be on a longer rate of somewhere between three to five years. This reduces the risk of getting hit with large increases if or when rates increase again – and they almost certainly will.
You also want to make sure that you have the ability to pay extra, and take advantage of the offset home loans if you can, or a revolving credit if your bank does not offer the offset home loan.
In other words, set up a mortgage strategy that works for you and remove the entire focus from watching the interest rates too closely.
We’ve always said that there’s been too much focus on trying to get the best interest rate when the focus really should be on how much interest you’re actually paying, and that it comes down to how quickly you can pay the mortgage off.
The financial uncertainty also highlights how vulnerable New Zealand is as a market, and even though the expectation is interest rates are going to drop there is also the risk that something might happen in the world that means they don’t drop as expected, or could even increase again soon.
We’re Here to Help
Don’t forget, we’re open to have a conversation any time, and that conversation costs you zero dollars.
It therefore makes sense to bounce your ideas, or get a second opinion.
The other point is you don’t have to wait until your mortgage is ready to be refixed. You can start looking at options any time, and sometimes it’s worth breaking your existing fixed loans to get onto the lower rates now.
