Mortgages
2 min read
Yesterday, the Reserve Bank cut the Official Cash Rate (OCR) by a whopping 0.5%.
This is big. A couple of weeks ago only a few economists thought a 0.5% cut was on the cards.
It takes the OCR down from 5.25% to 4.75%. The second cut this year … and it might not be the last.
So, what does it mean for your mortgage interest rate?
A day before the announcement, banks started dropping rates.
ANZ slashed its 1-year fixed rate to 5.59%. To be clear, this isn’t an advertised rate. But, it’s how low they are willing to discount their rate behind the scenes.
It’s a big discount. 0.6% below their current advertised rate of 6.19%.
I need to issue a wee correction. In yesterday’s email, I said that this rate is only available through mortgage brokers.
I’ve had confirmation through ANZ that this is also available directly through the bank as well.
It’s not publicly advertised, and they’re calling it a “limited-time discretionary rate”.
That means it’s not going to be around forever … but it shows how far banks can cut their rates.
The other banks have also moved.
Most are dropping their floating rates.
You might wonder how a bank can possibly cut its rate by 0.6%.
Well, they have quite a bit of margin to work with.
The 1-year swap rates have fallen. Think of these as what it costs the bank to borrow to lend to you and me.
At its peak, the 1-year swap rate was 5.9%. Now, it’s closer to 4%.
So, the 1-year wholesale rate has fallen 1.9%.
But ANZ’s advertised 1-year rate has only fallen 1.2% from the peak.
It was 7.39% at the start of the year. Now it’s 6.19%.
So, there’s extra margin. That’s how ANZ can cut another 0.6% off its current rate.
That’s why I see ANZ’s cut as a scene-setter. It shows you how low rates can go.
Inflation has steadily decreased. It’s creeping closer to the Reserve Bank's target range of 1-3%.
The next official inflation data comes out next Wednesday.
But, the Reserve Bank has jumped the gun and declared that inflation is already within the 1-3% target band.
They’re probably right.
Almost all financial institutions see the war on inflation being won.
The Reserve Bank is confident we’re nearing that ideal 2%.
And as inflation comes down … so can interest rates.
With interest rates falling, bank competition will heat up. So, I expect banks to start competing with that 5.59%.
We’ve got inflation data out on Wednesday. We’ll likely see a rate around 2.5%. Within the target band.
Then, you have another OCR announcement at the end of November. I think we‘ll see at least another 0.25% OCR cut.
All of this puts downward pressure on mortgage interest rates.
Which means that next year will be interesting. You should start to see a bit of recovery in the property market.
So, if you’re looking at buying refixing – it might be time to get started on those plans sooner rather than later.
Managing Director, 20+ Years' Experience Investing In Property, Author & Host
Andrew Nicol, Managing Director at Opes Partners, is a seasoned financial adviser and property investment expert with 20+ years of experience. With 40 investment properties, he hosts the Property Academy Podcast, co-authored 'Wealth Plan' with Ed Mcknight, and has helped 1,894 Kiwis achieve financial security through property investment.
