Long-term mortgage rates have bottomed

Drop of water falling

We are starting to think that 5.95% for five years might be as low as the five-year fixed rate gets. Yes, short-term rates will go lower – and could get as low as 4.95% - but long-term rates look like they are done. In fact, the five-year rate may struggle to get below 6.50%. Our logic? For a five-year mortgage rate of 5.95% the bank has to find an investor prepared to invest for five years at 3.50%. There are not many people prepared to do that! On the other hand, luckily there is not too much demand for five-year rates - yet! As soon as demand for five-year fixed goes up, banks will be under pressure to increase the rate. Luckily most Kiwis still think rates are dropping further so we are possibly three or four months away from a rush on five-year fixed. Maybe there won't be a rush on the five-year fixed at all. The rate difference between one year at 4.95% and five years at 6.00%-plus will be too large for some people and they will opt for short-term rates. All of this means that you should look to start locking in five-year fixed rates from April onwards. Don't leave it too late and don't be too greedy. We've always said, “If the five-year rate gets below 6.00%, don't even bother thinking about it, just lock it in”. Even at 6.25% or 6.50% it is fairly good long-term value.  You can also split your mortgage into multiple rates and average the cost down.

Strategy 1

If you are inherently conservative, when the Reserve Bank drops the official cash rate (OCR) on March 12th, split your mortgage between three years and five years. You might still average the rate down to below 6.00%. Splitting reduces the risk of your whole mortgage rolling over to a high rate in the future. Splitting your mortgage is a good idea because nobody knows where rates will be in five years’ time.

Strategy 2

The one-year rate is going to get really low (circa 4.95%). This is 1.50% lower than the five-year fixed rate. Another option could be to take a mix of one-, two- and three-year fixed rates. The advantage of this approach is that you get the benefit of lower rates now. For cash-strapped property investors this is a good option. Interest rates are a natural hedge against property. Our view is that interest rates will only start going up again when the property market improves in two years plus. The biggest obstacle is tight lending criteria from the banks, which won't change anytime soon.