Lower interest rates - An argument to buy or break your current mortgage rates?

November 26, 2015

At the moment we are seeing unprecedented rates by the banks. Each offering great interest rates as the jockey for position. And as of the 29th October, the Reserve Bank of New Zealand (RBNZ) has left the Official Cash Rate (OCR) at 2.75% - which means that we’re likely to see these interest rates for at least another three months until the OCR is revisited. The indications is that these could fall even more.

To read more about this, go to:

·         RBNZ holds OCR at 2.75%

 

All in all, its got to be good news for borrowers right?

Generally yes! These lower rates are making it extremely attractive for lenders, meaning savings of thousands of dollars in repayments over the course of a loan and the ability to actually pay off a house even faster than historically (such as 12-18 months ago).

It’s a process of shopping around for the best deal and looking at small print in terms of potential hooks. The provision of the latest gadget as part of your package may cost you thousand in the long run – so be sure to do your due diligence. Even better – enlist the services of Mortgage Broker, they’ll be able to determine the best package for you and it’ll cost you nothing (Mortgage Brokers are paid by the banks themselves).

As of the 29th October 2015, www.mortgagerates.co.nz provided the following summary of current rates by the leading banks.

 

While there are some obvious benefits to those new to lending, is there significant enough savings for those that currently have mortgages that have been locked in for a specific period of time at higher rates?

In many cases there will be an argument to break your current mortgage contract and remortgage at a more favourable rate. But there are a number of things to take into consideration before taking the leap of faith:

  • The length left on your mortgage term
  • The value of your mortgage, and
  • The cost to break the contract. “Banks use complex formulas to calculate these costs, which are based on the length of a loan, and increase if wholesale interest rates drop.”[1]  While this could literally be into the thousands, both circumstance (the ability to actually have the money to undertake the change) and actual amount need to be taken into account and ensure that the savings are there.

Of interest, there has been recent upsurge in the past 12 months as complaints to the Banking Ombudsman from bank customers have risen, with a significant portion based on the early repayment costs to break fixed-term loans since interest rates started falling in 2015.

While there are potential savings to be made, or the opportunity to reduce the period to outright home ownership, again it is important to do your due diligence and your first call should be to the bank manager to get them to crunch the numbers for you and (1) determine what the ‘break’ cost will be, and (2) determine if there is a financial advantage of doing so.

An astute individual may also employ a mixed strategy of the aforementioned, simply by determining what the break cost would be through their bank manager and employing the services of a Mortgage Broker to secure the best deal possible and determine the savings.

Over the past 25 years we have seen a decline in interest rates, where back in the 1991 it peaked at just over 15%.

 Sourced from http://www.rbnz.govt.nz/statistics/key_graphs/mortgage_rates/

 

While we ride the benefits of bottoming out interest rates, maybe we should be glad for the current rates instead of the additional hundreds of thousands of dollars more in mortgage repayments and an extra ten years to pay off that ourselves would be facing 25 years ago.

Have you taken the plunge with these lower interest rates or recently changed your mortgage to take advantage of the lower interest rates? We’d love to hear about your experiences.


Sources:
[1] http://www.interest.co.nz/personal-finance/78207/banking-ombudsman-confirms-borrowers-post-fixing-dissonance-are-clashing

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Filed under Property management \ Real Estate Investment

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