RETIREMENT CALC

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Major banks now below 3 percent

From Monday, Kiwibank will offer the rate on new and existing one-year fixed term loans to people with at least 20 percent equity.  ASB has announced the same rate will be available to its customers for a fixed period of two years.

 

Based on Kiwibank’s average loan size of $440,000 over 30 years, people rolling off an existing fixed rate of 4.19 percent could expect to save around $70 per week: the difference between $496 and $429. For those rolling off a slightly lower fixed rate such as 3.99 percent, that difference would be close to $60 per week.

Kiwibank’s general manager of product Nicole Pervan said that the rate cut gives customers more options. 

If existing borrowers who take up the rate keep their payments the same, they’ll pay off their loan faster and reduce their total interest bill. Other options are to put the extra money into a rainy day fund, hold onto it to pay for essentials – or put it towards something they enjoy.

“Customers with a fixed interest rate expiring within the next month are likely to roll onto a new interest rate 1 percent lower than their current rate, Pervan said.

“On an average sized loan, this will reduce repayments from $50 to $70 [per week], which will go a long way at this time.”

Newshub spoke to ASB chief economist Nick Tuffley and Squirrel chief executive John Bolton to find out whether rates might go even lower and what the rate means for borrowers, including first-home buyers. 

 

Will mortgage rates go lower?

People with fixed interest rate mortgages that are due to roll over may wonder if now is a good time to re-fix their loan, or to leave it on a higher floating rate in the hope that fixed rates will go lower in the coming months.

ASB chief economist Nick Tuffley, said that although he doesn’t rule out rates falling closer to zero, the 0.75 percent cash rate was put in-place for 12 months. The effects of the Reserve Bank’s qualitative easing mean that wholesale rates are currently at “incredibly low” levels.

“It’s always possible rates could go lower but we’re looking at a very good ‘bird in the hand’ at the moment.”

“The two-year rate at 2.99 [percent] takes into account all the actions the Reserve Bank has done to-date.”

Each person’s financial circumstances are different. A common approach is to put a portion of the loan on a fixed rate and another on a floating rate, to allow any extra payments made to offset the interest cost.

“Purely on a cost basis, when looking up to a five-year horizon, one or two-year fixed rates tend to provide the most value,” Tuffley said.

 

What should existing borrowers do?

Most homeowners already have part or all of their mortgage borrowing on a fixed rate.  

As Kiwibank and ASB now offer an under 3 percent rate, John Bolton, chief executive at Squirrel, said that other banks are likely to follow suit. This will allow homeowners to negotiate a lower, competitive rate when their current rate matures.

“Around $12 billion of mortgages roll [over] every month: what happens is that people [with] fixed rates maturing are looking at the market.

“It’s increasingly reasonable for someone to expect their bank will match those rates at 2.99 percent.”

 

Tips for first-home buyers:

With talk of house prices dropping by over 10 percent by the end of 2021, the removal of LVR restrictions and record-low interest rates, now could be a good opportunity for first-home buyers.

Bolton said that due to COVID-19, banks are increasingly tough in their decision-making and the big concerns are job stability and falling house prices.  Although LVR restrictions have been removed, they’re unlikely to make a significant difference to new borrowers.

“My advice is to keep saving your deposit and keep credit clean: in most cases, you still need a minimum 10 percent deposit – probably closer to 15 percent.”

“Right now, anyone that’s working for a company that’s claimed the wage subsidy makes it harder to get a pre-approval: we need to understand if your job’s safe.”

The drop in interest rates comes after the Official Cash Rate was slashed to a record-low 0.75 percent in March, followed by the removal of loan-to-value ratio restrictions in April. Both measures are expected to remain in-place for a minimum period of 12 months. 

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