Interest rates are starting to track up leading to significant cost implications for property investors. Some specific issues to be mindful of:
1. Why are interest rates going up?
- Interest rate markets are already pricing in a 90% chance of a rise to the OCR in August!
- The recent RBNZ comments around the Large Scale Asset Purchase (effectively money printing) are also influencing mortgage interest rates as they are now moving away from this which played its part in the reduction of rates over the last 12 months
- There are also other factors that you need to be aware of which may have a negative effect on interest rates over the next few years including banks having to hold more capital. This was on the table a couple of years back but delayed because of Covid
2. What should I do with my mortgage?
Asking questions like:
- When do your current fixed rates expire? i.e. are they all at the same time, or are they split over different terms?
- What current rates are you paying? i.e. are they reflective of today’s market rates, or should you be looking at breaking and re-fixing?
- What is your current repayment type? i.e. are you paying principal and interest, or interest-only?
- When is my interest only expiry date? In many cases, this can be different to your fixed-rate expiry date, as they are independent of one another.
There is no one-size-fits-all strategy, so the above might not be suitable for you, but it is at least worth considering what your intentions are moving forward and reviewing your existing debt position to cater to your intentions. In addition, at this time I’d definitely be recommending splitting your debt so you don’t have everything locked in at one rate, particularly if you carry larger amounts of debt (e.g. property investors).
3. If my rates are already fixed what options do I have?
There is nothing stopping you from checking your break fees and determining if it is worthwhile breaking and re-fixing. At KPM we run a break fee analysis to determine this and can help you with this free of charge.
4. Will interest rates continue to rise and where will they stop?
It’s hard to tell at this stage how high rates will go. There are various predictions around the interest rate market at the moment with some forecasts suggesting we will be in the 4’s by the end of 2022 across most or all terms.
Due to the fact this is certainly crystal ball gazing, it would make sense to lock in at least some of your debt on longer terms to avoid a shock from rate fluctuations – when coming off your fixed rates in the near future. While rates have gone up, a 5-year rate under 4% for example is still a very competitive rate as far as I’m concerned. It’s common for us to be greedy and want the lowest rate consistently – but at the moment for example a 3-year rate now is sitting at around 3.19-3.29%, bank dependent. While this is up on where things were a month ago, this is still lower than rates were at the beginning of 2020, and even lower than 2019. I personally fixed for 3 years at 3.89% in June 2019 – for example.
For any specific questions on your own strategy, please get in touch at [email protected]
ABOUT THE AUTHOR
Ryan is a part-owner of Kris Pedersen Mortgages as well as a property investor. Kris Pedersen Mortgages or KPM is the Principal Sponsor of the APIA.