Fixed Interest Rates – What You Need to Know

Fixed Interest Rates

You’ll find the answer to the above question in this article, along with a quick update on what is happening in the financial markets in mid-2023.

What Are Fixed Interest Rates?

A fixed mortgage rate refers to a mortgage loan where the interest rate remains fixed or locked in for a specified period, typically ranging from 1 to 5 years.

During this fixed period, the interest rate and monthly mortgage payments remain the same.

We previously discussed how banks set their fixed mortgage rates and you can read about that here.

Rates offered may vary between lenders, so it’s advisable to take advice from a mortgage broker to find the most competitive rate for your circumstances.

Fixed rates provide financial stability to borrowers, but it’s important to note that this kind of lending may be subject to break fees or early repayment penalties.

These break fees and penalties can occur if you decide to make changes to the loan, such as paying off some (or all) of the mortgage before the fixed term ends or if you want to refinance.

For those reasons, it’s recommended to carefully review the terms and conditions of any mortgage agreement and seek professional advice before committing to a fixed-rate mortgage.

Why Should You Fix?

There are several reasons why you might choose a fixed-term mortgage rate.

Some of the main ones are:

Predictability and stability: With a fixed mortgage rate, your interest rate and monthly payments remain the same for the duration of the fixed term. This helps in your budgeting since you know exactly how much you need to pay each week, fortnight, or month.
Protection against interest rate fluctuations: By choosing a fixed rate, you shield yourself from potential increases in interest rates during the fixed term. If interest rates rise, your fixed-rate remains unaffected, allowing you to maintain the same level of repayment.
Planning and financial security: A fixed mortgage rate allows you to plan your finances with more certainty, making it easier to budget and manage your monthly expenses. This can be particularly beneficial if you want to avoid any nasty surprises that may come with variable interest rates.
Peace of mind: For borrowers who value peace of mind and prefer a level of financial security, a fixed mortgage rate can provide reassurance and reduce the stress associated with potential interest rate fluctuations.

When Should You Fix?

There are plenty of benefits to having a fixed rate for your home loan.

However, there are also some things to be mindful of.

You can benefit from having your mortgage fixed if interest rates continue to climb.

However, if interest rates are expected to decrease, then fixing your home loan at a peak rate is not a good idea.

This all makes perfect sense, right?

But how do you know when rates are going to climb or when they might decrease?

Well, the best thing to do is seek advice from an expert who is negotiating interest rates with lenders on a week-to-week basis – a trusted mortgage broker.

As a broker, we monitor what is happening in the market and can usually make fairly accurate predictions on what interest rates are going to do.

Other Important Factors to Consider

However, when selecting the fixed interest rate terms, there are many important considerations that are unique to you that you need to be mind fall off, such as:

your mortgage repayment goals (i.e. using surplus income to save interest on your mortgage)
your property ownership plans (i.e. sell & buy to up or downsize or move towns)
current & forecast economic conditions
what do you think interest rates might do over the next 1-5 years
how long, stability of repayment is required (i.e. tight budgets during maternity leave)
how often do you want to review the mortgage (especially for mortgage holders that have the ability to pay off regular lump sums)

As your adviser, we will work through and discuss these to ensure your decision matches your future requirements. Then you need to form an opinion, with the help of your adviser, and choose how you want to move forward.

If you believe rates will stay the same or drop over the next 1 year to 18 months, then you would probably consider a shorter-term rate.
If you believe rates will stay the same or move up over the next 18 months – 3 years or more, then you might consider a longer-term rate.

Are Fixed Interest Rates on the Way Down?

In the current market (the date of this newsletter), the Reserve Bank has indicated that its monetary tightening period is at an end and the OCR is on hold.

That means that future adjustments to the OCR should be cuts rather than increases.

So, it may not be the best option for you to jump on long-term fixed rates simply because they are the lowest on offer at this moment.

In theory, if the OCR decreases in the second half of 2024 as predicted, then mortgage rates should also decrease.

And you don’t want to have your mortgage fixed at a 5-year term on a rate that was set at the peak of the OCR.

Infometrics chief forecaster, Gareth Kiernan advises, “If this is the peak in mortgage rates, it might be the last point in time to be fixing a mortgage for too long.” [source]

If your mortgage rates are about to come up for renewal, then it’s time to seek advice about your next move.

Chat with the team at Oliver Broomfield Mortgages & Insurances for mortgage advice you can trust.

What’s Been Happening This Month?

Mortgages Are Down

The data is in and new mortgage lending is down 23% in April last year and 45% on April 2021.

Clearly, the Reserve Bank’s goal to impact monetary policy with changes to the OCR has certainly had an impact on people’s borrowing power and appetite.

LVR Restrictions Eased

As of 1st June, the Reserve Bank has eased its loan-to-valuation restrictions.

This has been good news for first-home buyers.

The bank’s response has been to relax their criteria for uncommitted monthly income so people may be eligible to borrow more than they could before, giving more opportunities for home buying.

This has resulted in more inquiries and first-home buyers are once again out looking for property and securing mortgages.

As interest rates are still high, we still recommend that you should seek advice to ensure affordability.

What is Mortgage Stress?

Mortgage stress is defined as households having to spend more than 30% of their income in servicing their mortgage.

By that definition, many households in NZ are currently experiencing mortgage stress.

Recent Canstar analysis shows that to be able to afford an average-priced house (worth say $995,000) with a 20% deposit and repay the mortgage on current rates, Auckland households need nearly $80,000 more than the average income (which is $141,853).

Canstar general manager Jose George says the analysis shows how tough it is in today’s market to avoid mortgage stress.

“Paying more than 30% of the household income into a mortgage creates all sorts of other pressures, including being able to afford other bills and maintain general well-being.

It is a really difficult situation to be in and our analysis suggests numerous families across New Zealand will be facing financial pain.”

Whether you’re a first home buyer, looking to refix your mortgage rates, or considering investing in property, we can provide you with the trusted, expert advice you need.

So, get in touch with the Oliver Broomfield Mortgage team today.

Until next time,

Oliver

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Frequently Asked Questions

Why use a mortgage broker?

The advantage of using a mortgage adviser is that they can negotiate with a number of lenders to find the deal that best suits you. They do all the leg work for you, saving you time.

Why don’t I just go to the Bank myself?

We help assess all your options, whereas the Bank is restricted by being only able to present one view.

Is it better to use a mortgage broker or a bank?

While banks expect the client will negotiate with them, or accept the given rate, mortgage brokers are more likely to go to bat for you, to get a lower interest rate.

Why choose Oliver Broomfield Mortgage & Insurances?

Our processes make financing your house purchase easy; providing quick personal service that takes the stress out of financing your home loan. With our wealth of experience in the finance industry, we know how to get the best deal for you.

Can I organise a mortgage without meeting in person?

Absolutely! We can still work with you using email, phone calls, and video calls. Whatever your financial situation is, we have a range of options to communicate with you whatever circumstances.

Can my application be done via the internet?

Yes, we have an online application system or a pdf form that can be completed. Supporting documents can either be uploaded directly into our system or emailed. We can use telephone, zoom, or email for further clarification or look at scenarios and receive and send information.

What is a home loan pre-approval?

A home loan pre-approval is a conditional approval confirming that we can lend you a certain amount of money, provided the property you purchase meets the lender’s home loan criteria. It’s a good idea to ask us for a home loan pre-approval before you start house hunting. It will help you determine how much you can borrow and to give you some bargaining power when negotiating a purchase price.

How much deposit do I need?

Saving a deposit is probably the biggest hurdle for most first home buyers. First home buyers need to have saved at least 5% deposit with 20% or more being the optimum. Remember that this can be made up from a KiwiSaver first home withdrawal and some first home buyers may also be eligible for a HomeStart Grant. Gifts and deed of debts from friends and family are also common.

Can I buy with less than a 20% deposit?

While there has been a lot of publicity about the need for home buyers to have a 20% deposit; there are still options available for you. We can talk you through what may be available to you including:

The ability to access low equity loans
Using your Kiwisaver contributions towards your deposit
Building your own home
Accessing parental assistance to increase your deposit.

Why does the size of my deposit matter?

The size of your deposit makes a big difference to the interest rate and the other costs you could potentially pay on your home loan. Generally, for lending where the deposit is less than 20%, the lender will also charge a Low Equity Fee (LEF) or Lenders Mortgage Insurance (LMI). Interest rates may also be higher for loans with a low deposit.

What do banks look for when applying for a mortgage?

Whilst assessing a loan application, banks will scrutinise your bank account (usually the most recent 3 months bank statements).

In particular, they are looking at how well (or not) you manage your account.

Do you have dishonors, and or unauthorised overdrafts?

The better your account conduct the better your chances!

The banks also want to make sure all expenses including fixed and discretionary costs are included in the mortgage application expenses.

How much can I borrow for a first home, rental property or build?

This will be determined by your income, your capacity to repay the loan, and the property type along with the current lending restrictions imposed by the reserve bank. Contact us today to find out.

How much do I need to earn to obtain a loan?

The income you will need to earn will depend on the size of the loan, the bigger your loan the more you will need to earn.

As a rule of thumb if you are a first home buyer who is currently renting and have also been able to save some money there is a good chance you will meet the banks’ income criteria.

What is LIM Report (Land Information Memorandum)

A LIM report is a summary of information that the local Counsel hold on a property. The report covers off information regarding consents, permits, code of compliance, potential erosion, subsidence, flooding of any type and the possible presence of hazardous substances. private and public stormwater and sewerage drain, rates, including any overdue rates.

Your solicitor should review this document.

Can I buy a second home or investment property?

Absolutely, we do this every day for many existing clients. We can use our scenario calculator to ensure you meet lender criteria and affordability for yourself.

I am an overseas resident. Can I borrow money in New Zealand?

Yes, you can borrow money in New Zealand and may be able to borrow up to 80-90% of the purchase price of a home.

Can I withdraw my Kiwisaver?

To be eligible to for the KiwiSaver First Home Withdrawal Scheme you must:

Be purchasing your first home;

Have been a member of KiwiSaver for a minimum of three years;
Have your KiwiSaver account with a KiwiSaver provider that allows saving withdrawals; and
Intend to live in the property for at least six months
We recommend that you contact your KiwiSaver provider and check their individual policy on withdrawals for first homes.
If you are eligible to withdraw money from your KiwiSaver, you may also be eligible for a first home deposit subsidy of up to $20,000.00 from Housing New Zealand – known as a HomeStart Grant.

What costs should I expect when buying a home?

Using a mortgage broker generally means no direct costs to you for their services but there are other unavoidable costs. These may include:

A Registered Valuation ($800 – $1,200)
Solicitor Costs ($800 – $1,500)
LIM report ($150 – $400)
Builder’s Report ($100 – $500)
Weather Tightness Report for Monoclad houses ($300 – $1,000)
Finance fee for non-bank lending (~1%)

Prices can vary. Always request a quote before ordering any of these services.

Is getting a mortgage complicated?

The banks all have different policies and risk tolerances. Buyers can get frustrated and waste a lot of time going to banks that won’t suit their needs.

Using a mortgage broker gives you a view of all the banks and their policies. It means you find the right bank faster and with less stress. With a mortgage broker, getting a mortgage isn’t complicated.

It’s about proving you have enough deposit and enough income and then heading to the right bank with that information.

Some tips to making your mortgage application easier: get your documentation sorted early and keep your spending as low as possible in the 3 months leading up to your application.

Do mortgage brokers obtain loans from the banks or lenders that pay them the most?

We will always act in the best interest of the client and will ensure that any deal we broker is the best we can do for the client.

While there can be variances in the amount different lenders pay us we do not favour any particular lender for this reason.

We are also members of NZFSG & Financial Advice New Zealand both of which have ethics that we must adhere to.

We can also be audited at any time by the FMA (Financial Markets Authority)

If the banks pay a commission is this then added on to the cost of our loan?

No… The lenders that use our services see us as an efficient channel to obtain business from. They only pay us on success i.e. when the loan settles.

We sit alongside their other channels such as a bank branch or mobile manager.

The cost of obtaining business from a mortgage broker is comparable to these other channels the banks choose to use.

For this reason, it will cost you no more to use our services.

What if I sell my home or refinance my mortgage shortly after using a mortgage broker?

Mortgage advisers (often called mortgage brokers) are paid by the bank when a mortgage is drawn down. If that mortgage is discharged (repaid and closed) within a short amount of time – typically 27 months – the broker must repay some or all of the commission (often referred to as a clawback). In this instance, the mortgage broker has essentially done the work for no pay.

We reserve the right to charge for our time if a clawback is incurred. The fee will be the estimated amount of hours the mortgage took at an hourly rate of $250 per hour. Unlike other fees, such as Break Fees from the bank, we have capped the amount we can charge clients at $2,500.

If you are refinancing or selling your house, the best thing to do is immediately talk to your adviser and discuss if any clawback fees will be charged.

Should I own the property in my own name, or a Trust or Company?

If the property is for you to live in, this is something you should discuss with your Lawyer at your initial meeting. If it will be an Investment Property, you should discuss with your Accountant. We would also suggest you find a property accountant, someone who deals in property all the time rather than just as a side part of their business.