Mortgage wars: How to cash in

Home loan borrowers are the winners as banks cut mortgage rates across the board, but there’s a warning that it may not be the boon some expect it to be.

Kiwibank has cut its one-year rate to 3.55 per cent. ANZ, BNZ, Westpac and ASB have also cut across most terms, with rates down to 3.69 per cent. It comes after the official cash rate (OCR) was cut to 1 per cent.

A decade ago, interest rates reached a peak of more than 10 per cent on some terms. Broker John Bolton, of Squirrel Mortgages, said it reflected a change in sentiment in the market. The OCR reduction was steeper than many had predicted, but a cut of that level this year had been priced in by markets.

But markets had now adjusted again to the prospect that the rate could still drop further amid slowing local growth and international market turmoil and geopolitcal risk, he said. ‘‘Markets have priced in the fact the OCR looks likely to keep falling, making it easier for banks to pass [the drop] on to home loan rates. That’s what we’re seeing.’’

He said while New Zealand’s rates were low by historic standards, they were not as low as some. Australia’s have reached less than 3 per cent. A Danish bank has launched the world’s first negative interest mortgage, where borrowers are paid to take out a loan.

Bolton said it was a good environment for borrowers but there was another side to the equation. ‘‘The reason this is happening is not so good. It’s like having a party on the Titanic before it sinks. I’m not sure how I feel about it... it’s a bit scary.’’

He said generally it was not worth breaking a loan term to take a new special. Most people were on relatively low home loan rates and rates could yet be lower by the time people rolled off fixed terms, he said.

While the Reserve Bank hopes that lower interest rates will spur spending, Bolton urged against splashing out with money left over thanks to lower mortgage payments. ‘‘Eventually – no one knows when – interest rates will go up and that can be a really hard adjustment if you’ve got used to it. Going from 3 per cent to 4 per cent is a 25 per cent increase in your interest cost.’’

He said borrowers could take the opportunity to pay down debt faster.

If you kept your repayments at the same level when interest rates dropped from a 5.5 per cent rate to a 3.55 per cent rate on a $400,000 mortgage, you could pay off your loan six years faster.

Economist Shamubeel Eaqub said rates were likely to drop further, driven by plummeting international bond yields.

But he said borrowers should not hold out for a negative rate such as that on offer in Denmark.

New Zealand banks’ requirement for domestic funding meant they had to offer high enough deposit rates to attract some level of deposits from New Zealanders.

‘‘At some point deposit rates can’t go much further before people say ‘where else can I put my money’ but that’s less of a worry than some people think because people would rather take no interest than risk losing their money.’’

Brad Olsen, an economist at Infometrics, agreed. ‘‘Everything does point towards interest rates continuing to shift lower over the near term. The aggressive cut to the OCR saw full pass-through to floating mortgage rates, and fixed mortgage rates continue to head lower as bond rates also reduce further.

‘‘I don’t think the Reserve Bank is done yet with further rates cuts, and we expect the OCR to fall to 0.5 per cent by early 2020 – the Reserve Bank has made it clear that it is willing and able to cut, and given the economic outlook is unlikely to materially improve – and could deteriorate further – there’s nothing to suggest that the Reserve Bank is finished yet.

‘‘However, even with interest rates continuing to fall, access to credit isn’t necessarily getting easier, so we might not see the increase in investment and borrowing that the Reserve Bank will want to see.’’

Economist Shamubeel Eaqub said rates were likely to drop further, driven by plummeting international bond yields.