Interest rate report #2

Here is your monthly interest rate report.

This is the second edition of this newsletter.

It’s here to give you a quick, plain English update on interest rates. That way, you can make an informed decision about your mortgage.

How are interest rates changing?

Interest rates are falling. The falls are small and slow. But they are there.

Last week, three major banks (BNZ, KiwiBank and ASB) dropped some of their rates.

Here’s the big news since my last report. Some banks now have a 1-year interest rate under 7%. We haven’t seen that advertised for a while.

Last week, KiwiBank dropped its 1-year rate from 7.25% to 6.99%. They followed TSB, who made a similar drop 3 weeks before.

When you average it out, all fixed interest rates went down a smidge over the last month.

Well, maybe not the 2-year rate. You could argue that a 0.01% drop doesn’t really count.

As I’ve been saying for a while – the falls are not massive. But the trend is down.

You can see all the banks' latest interest rates here. You can also see how the banks are changing their interest rates here.

How much can I negotiate off the interest rate?

While the banks aren’t dropping their advertised rates much – you can still negotiate.

My team at Opes Mortgages are negotiating large discounts for some borrowers. The biggest discounts are now on the 6-month rate.

The average bank is advertising a 7.33% 6-month rate. But if you negotiate, our brokers are getting that down to 6.93% on average.

That 0.39% discount saves $30 a week on a standard $500k mortgage. That’s a $1,560 annual saving.

Here are all the discounts my mortgage brokers are negotiating:

If you read my last report, you’ll see that these negotiated (or discounted) rates are similar to last month.

The banks are slowly dropping the rates you see advertised on billboards and TV.

But I didn’t see a drop in the rates my brokers can negotiate over the last month.

How long should I fix for?

I’m still bullish on the short-term rates. No change here from last month.

Though, I should point out – I'm not alone. 

Most borrowers still prefer short-term rates. That's according to Tony Alexander's latest mortgage advisers survey:

6 months ago, everyone was going for the 18-month and 2-year rates. Now the mood has changed.

People expect interest rates to drop so now prefer the 1-year rate.

Just remember, the shorter (6-month or 1-year) rates aren’t right for everyone. Check out this article by my colleague April to get a sense of how long you should fix for.

Are banks being tougher when looking at my mortgage application?

While the rates you pay are falling, the servicing test rates haven’t moved at all.

They’re still testing you at about 9%.

Remember, this is the rate the bank uses to stress test your application when you want to get more lending.

As interest rates fall, these will likely come down a bit. That will make it easier to get your mortgage application approved.

So watch this space over the next 1 to 2 years.

What to look out for this month

The big announcement comes tomorrow. The Reserve Bank will announce its latest OCR decision.

My best guess is that the OCR will stay at 5.5%.

The real action will happen in the new set of forecasts they’ll release. This will tell us where the Reserve Bank’s head is at:

• When do they think they’ll bring interest rates down?
• Will it still be early next year? Or will it happen this year?
• Do they think house prices will go up faster or slower?
• What about inflation? Are they worried that domestic inflation is a bit sticky?

We’ll find out tomorrow.

Keep an eye on your inbox. My colleague Andrew will send out an update on Thursday. He’ll cover everything you need to know in his Private Property newsletter.

Talk to you again next month,

Pete