On face value, now looks like a great time to be a borrower.

In the New Zealand mortgage market, we’ve recently seen Kiwibank come out with New Zealand’s lowest-ever five-year rate, ASB aggressively slice large chunks off their three, four and five-year rates, and TSB come out with an offer to match any rate from the Australian banks.

Traditional pricing heavyweight ANZ has come out with a special targeted rate around the Healthy Homes legislation, which includes an exceptionally low one-year option of 3.75 per cent.

Storm clouds loom

There is, however, a storm cloud on the horizon. The Reserve Bank is talking about increasing the amount of capital banks need to hold in their coffers.

There’s some debate going on between economists wondering, if this happens, whether the flow-on effect could be increased interest rates.

It could get a bit scary. UBS economists suggest we could see an increase in mortgage rates of between 86 and 122 basis points, or 0.86 to 1.22 per cent.

On the flipside, some commentators, including BNZ chief economist Tony Alexander, believe if that happens, the Reserve Bank would just cut the official cash rate (OCR), to compensate. The OCR is a tool used to influence the price of borrowing money in New Zealand.

But I’m worried that since the most recent cash rate review, the Reserve Bank has seen “a weaker global economic outlook and reduced momentum in domestic spending”. That means OCR cuts are likely. Some commentators believe we could see this as low as 0.75 per cent by next year.

Not much gas in the tank

All this isn’t leaving much gas in the tank for the Reserve Bank to pull the OCR back further if banks were to pass on to you the costs of holding more capital.

The Reserve Bank’s been upfront: they’re looking at this capital increase to prevent a one in 200.year banking crisis. It’s an admirable goal, but the question does need to be asked whether the potential detrimental effects of this could outweigh the benefits.

All this is happening at a time when property investors are already taking cashflow hits in the form of other changes – the ring-fencing of tax losses and upcoming Healthy Homes legislation forcing landlords to upgrade heating and insulation to minimum standards.

Banks are also making it harder for people to get interest-only loans, which is a flow-on effect from issues they’re seeing in Australia.

Time to act now

Here in New Zealand, we tend to just ‘set and forget’ our interest rates, but here’s a heads-up… Right now, I strongly suggest you put some time and effort into your mortgage, in view of the fact that it’s often a family’s biggest expense.

Review what you’re paying in interest rates. Check when your fixed rates expire, if you have a portion fixed. I’ve found there can even be an upside to breaking your rate early, in some cases.

Late last year, I was able to get clients out of a fixed rate with no break fee. We then re-fixed their home loan at a substantially lower rate.

I’ve seen this happen many times since November, when we first started seeing the banks aggressively competing.

So, don’t sit and wait. Check now to see if there’s any benefit in reviewing your mortgages in the light of these sharp new rates.

Published 26 May 2019

This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.