NZHL CEO Kip Hanna shares his thoughts on the learnings from the last interest rate cycle, how homeowners and investors can prepare for lowering interest rates, and what to consider when refinancing.
Until recently, New Zealand was experiencing a historically low-interest rate environment; many borrowers hadn’t previously experienced significant interest rate fluctuations – with many first home buyers having only experienced a reducing interest rate market.
There were a few lessons learned in this cycle: the most significant is the nature of interest rates to quickly (and considerably) shift depending on wider economic influences (such as inflation).
Borrowers who kept their payments higher level when their interest rates reduced insulated themselves from the rising interest rate market. However, many borrowers have budgeted based on their current interest costs without allowing for changes they may face at the end of the fixed-term period.
So, the key takeaway for borrowers is to consider long-term affordability – what’s the worst-case scenario, and how can you best prepare (and if possible, get ahead)?
It’s never been more important to get personalised advice from a qualified financial adviser – they can help you determine a plan which supports your long-term goals and insulates you from market changes.
Coming off a fixed-term loan.
Approximately half of home loan borrowers were due to come off a fixed term in 2023, the majority of which have or will be facing a sharp rise in interest costs.
There are different ways to structure your home loan but it’s highly dependent on your current financial situation and your plans – a home loan for someone who is planning on staying long term in their family home will look very different to someone who is looking to sell in the next 6, 12, 18 months.
If you have a fixed loan due to end or your circumstances have changed, my best advice is to seek advice early.
Declining interest rate cycle.
We’re likely entering into a lowering interest cycle meaning interest rates will fall. The question is – how quickly rates will come down and when?
Predicting this is extremely challenging however, depending on financial security, surplus/ financial wiggle room and risk appetites, the projected interest rate cycle will impact decisions on how long people will lock in rates.
We often recommend splitting their home loan across different loan terms to reduce the impact of interest rate movements, particularly for those on a tight budget.
What to consider when refinancing.
Many borrowers will be looking at shifting providers and refinancing their home loans which in many cases can be beneficial. At NZHL, we use our unique monitoring tool DebtNav to calculate their loan balance at the end of their current fixed term against their balance if they were to refinance with a tailored home loan structure.
Timing is crucial which is why getting personalised advice is so important, particularly coming into a downward interest rate cycle lenders are likely to charge break fees.
A break fee is typically charged by a lender if you end a term early. This could impact those staying with their provider but breaking a fixed term loan to refix at a lower rate or those who move their entire home loan to another provider.
A break fee considers the cost of funding the loan to offset the margin they would have made lending at the higher original fixed term rate. Remember your lender will lose profit in these situations as they will have to lend at a lower prevailing market rate.
Your lending will also consider how long you have left on the fixed term and the loan amount – how much are you breaking?
Break fees are not as common in a rising-rate environment as the lender can typically relend the money at a higher rate.
If your lender gave a cash contribution (when you first took out the loan), you may be obligated to pay some of that back depending on how long you have left on your term and the lender. However, this cost can often be offset if your new lender offers a cash contribution.
So, is refinancing worth it?
It’s about getting advice to see if the timing is right.
At NZHL, we don’t consider your home loan to be set and forget. We believe in regular reviews, so refinancing should be considered at various points throughout your loan (interest rate or lifestyle changes) as it can often save you money or better utilise your money to support your longer-term goals.
We believe that it is not the rate you pay it is the rate you pay off your home loan that counts. However, all costs need to be considered and the right home loan solution tailored to your needs.
It’s a good discipline to continue with the same repayment amount even if your interest costs are lower – to pay off your loan faster and give you good flexibility for the future.
As interest rates drop, there may come a time when your money in savings is better utilised on reducing/offsetting your debt which (in a way you can still access funds if you should need) reduces your interest costs and further contribute to paying off your loan. Again, it’s all about tailored advice to fit your needs.
For buyers looking to purchase a new home, there’s a trade-off between lower interest rates and when house prices are at their lowest. It’s as difficult to pick the bottom of the housing market as it is to pick the bottom of the interest rate cycle.
It’s best to define your long-term goals and access affordability with a financial adviser to ensure your home loan is set up right and fits your unique needs from the get-go.
If you have questions about your home loan, chat with your local NZHL Mortgage Mentor (qualified financial adviser) who can help access your options to take control of your home loan and maybe even get to debt free sooner.
Your dedicated mortgage mentor can help navigate all the ups and downs with regular reviews and coaching for the life of your loan.
*Please note – Kip Hanna is the CEO at NZHL and has written this blog based on his experience. This blog is intended to be general in nature and should not replace personalised financial advice by your mortgage adviser.