Why Are Long Term Fixed Mortgage Rates Lower? – Are They a Good Option?

In August 2024, the Reserve Bank (RBNZ) finally did what all mortgage holders hoped for and cut the Official Cash Rate (OCR).

This triggered a flurry of interest rate cuts from all mortgage lenders.

Many longer-term rates are now under 6%, which is a welcome relief to many borrowers.

We need to look at reasons why the longer-term rates are lower than the short-term rates and whether you should consider them for your current mortgage strategy.

Why Are the Long Term Fixed Mortgage Rates Lower?

At the moment, the long term fixed mortgage rates are lower than the shorter ones, because of the current economic conditions and market expectations.

Reasons why this has happened:

1. Market Expectations:

When the OCR is predicted to decrease, lenders often price their longer-term rates lower. That’s because they know their borrowing costs will drop over time.

It makes offering more attractive long-term rates less risky for the lender and when it comes to fluctuating costs, they know they are not likely to lose money on the lending.

Conversely, when the lender thinks that the cost of borrowing in the long term is going to increase, they will start to increase the longer-term interest rates.

2. Inflation:

When inflation is set to decrease, lenders can set their longer-term rates lower as they have more confidence that inflation will not erode the value of the money they lend.

Lower inflation expectations reduce the pressure on future interest rates, meaning longer terms can be set at a lower rate.

3. Bank Funding Costs:

NZ banks source their funding from domestic and international markets.

So, the cost of borrowing money is influenced by both global and local markets.

As the cost of obtaining long-term funding becomes cheaper than short-term funding, the longer-term interest rates will reflect the decrease in costs.

4. Competition:

In a slow property market, there are only a small number of new borrowers entering the market.

So, lenders aggressively competing for market share will reduce their long-term rates to appeal to borrowers looking for long-term stability.

No one thing creates lower long-term rates. It’s all about lenders managing their risk profile, and ensuring they cover future uncertainties.

In a declining market, we can expect the longer-term rates to be cheaper than the short-term rates, and vice versa in a rising market.

Should you take the long term fixed mortgage rates now?

The decision of whether to choose a longer-term fixed mortgage depends on several factors such as:

individual circumstances and requirements
current economic conditions (inflation, employment & global events)
how long stability of repayment is required
how often do you want to review the mortgage

Advantages of a longer-term fixed mortgage:

Predictability: You’ll know exactly how much you’ll be paying each month for the entire term of the mortgage, making budgeting easier.
Rate Protection: You’ll be protected against rising interest rates, which can significantly increase your monthly payments.

Disadvantages of a longer-term fixed mortgage:

Opportunity Cost: If interest rates fall significantly during the term of the mortgage, you may miss out on the opportunity to refinance at a lower rate.
Early Repayment Penalties: Some lenders may charge penalties for early repayment of a fixed-rate mortgage, which can be costly if you need to sell your home or refinance.

Would You Fix Your Mortgage Long Term?

Commentators are predicting interest rates will reduce further in the coming months, so:

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 1-3 years or more, then you might consider a longer-term rate.

Of course, everyone’s circumstances are different, so I would recommend a discussion with your mortgage adviser to run through the above discussion points.

It wasn’t so long ago that the Reserve Bank was saying the OCR would not be cut until 2025.

But, with weaker-than-expected economic conditions, they made the move to cut the OCR from 5.5% to 5.25% in August.

In the wake of that announcement, economists tipped there could be further reductions of 25 basis points in both the October and November reviews.

As the weeks have progressed, sentiment has intensified, and economists are predicting that an October rate cut is all but a certainty.

They are saying the only discussion the Reserve Bank should have is whether that cut should be 25 basis points again or bumped up to a cut of 50 basis points.

Why are we expecting these big cuts now when they were not on the cards two months ago?

Well, it seems inflation has largely been tamed by the extended period of restrictive monetary policy, expected to fall within the targeted range of 1-3% in the September quarter.

Inflation was the key driver for keeping the OCR high, so now that it is thought to be under control, rates can drop again.

So, in answer to the question of whether you should fix long now, we will probably caution against it as if the current trajectory continues, rates will continue to drop in 2024 and 2025

Our recommendation would be to seek expert advice from us here at Oliver Broomfield Mortgages and Insurances before making any decisions about your mortgage.

We can offer tailored advice based on your financial goals and situation, aligned with what we believe is the best choice in the current market.

Reach out to our team today for a no-obligation chat.

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.