Lock in low interest rates

The end of the record low interest rates era is looming, so homeowners should think about how to take advantage of low rates while they still can. Miriam Bell reports.

After several years of falling mortgage rates, which have left one- to three-year fixed rates ranging from 2 per cent to 3 per cent on average, economists are forecasting rate hikes once the Reserve Bank starts to lift the official cash rate (OCR).

Westpac now expects the OCR to start rising from August next year, ANZ expects it to go up next February and Kiwibank is picking an increase in May.

Long-term home loan rates have already started to rise.

Westpac’s acting chief economist Michael Gordon says his team expects floating rates, and shorter fixed-term rates, will be stable over the coming months.

So homeowners have a window of opportunity to use low rates to improve their situation, including refinancing a mortgage to get better terms, borrowing more, trading up properties or borrowing to renovate.

AdviceHQ director David Green says homeowners should review their financial structure and arrangements, particularly if they have not done so for a while. Some might decide to refinance, which could save thousands of dollars on interest payments and reduce debt.

People should consider their best option and how to achieve it most effectively, he says.

There will sometimes be a break fee to pay, which can be significant if new rates are a lot cheaper. ‘‘While this can mean simply refixing existing loans at a lower rate, it can also require shopping around if the existing bank is not playing ball on refinancing terms,’’ Green says.

‘‘Some of my clients have had to do this recently and ended up in a much better position as a result.’’

More people are now looking to lock in loans for longer, he says. ‘‘As the gap between short and long-term rates starts to get bigger, people want to take advantage of current long-term rates before they increase more.’’

Making use of lower rates to trade up to a more expensive property is another option for people who want a larger house to better meet their needs, or to move to a different area.

One of Green’s clients made a big leap up the ladder, moving from a $1.5 million property to a $3m one.

That case was situational but any such move does not come free, he says. ‘‘There are costs involved but, if done successfully, it does generate added value and equity, so it can be beneficial.’’

But there can be problems with trying to trade up in a rising market.

Mortgages Online director Hamish Patel says house prices have been moving so quickly it is easy for homeowners to get caught out when looking to buy a property after having sold theirs.

‘‘It is a mistake to think that because you have sold your property for a good gain, you can then automatically trade up to a

Mortgages Online director

more expensive home and can take your time doing it.

‘‘I have had a number of clients who have done that and the market has moved past them,’’ says Patel.

They have ended up having to compromise on the type of house they have bought, or the area they have bought in, or they paid much more than planned and have taken on more debt, he says. ‘‘People need to be realistic about what they want and what they are prepared to pay to trade up – before they sell their own property. They also need to do their homework, look at the actual sales data and base their decision on that.’’

Patel says where interest rates are sitting now should not affect long-term financial decisions, such as buying a more expensive house, which entails long-term debt.

‘‘On the other hand, it can be a good idea to take advantage of low rates to have a real shot at paying down debt to get yourself into a better financial situation.

‘‘If you are in a position where you can pay the additional debt off over about five years, another reasonable option could be to borrow more on your loan at a low rate to upgrade your existing house.’’

People often only do renovations when they are planning to sell, he says. ‘‘But, in the current market, doing a renovation and holding means value is added to the property and the homeowners get to enjoy the lifestyle benefits.’’

Data suggests more people are choosing to upgrade their existing home than are trading up to another property.

While 27 per cent of respondents to Stuff’s recent NowNext survey were planning to carry out renovations, only 17 per cent were thinking of moving. Likewise, a Real Estate Institute analysis shows only a marginal increase in the percentage of sales of larger (200 square metres and above) properties, from 20.9 per cent in May last year to 22.1 per cent in May this year.

Real Estate Institute acting chief executive Wendy Alexander says that since emerging from the level 4 lockdown at the end of April last year, Kiwis’ attitudes to their homes have changed.

There has been a significant uplift in people renovating their homes or adding amenities such as spa pools or louvre roof systems, and part of this is people taking advantage of low interest rates, she says.

‘‘We are not financial advisers but our recommendation to people is not to over-leverage themselves from a borrowing perspective and to be aware that interest rates could go up at any time.

‘‘Before undertaking any significant renovations or upgrading project, it is worth having a discussion with your bank about how much the renovations might cost and any contingency you might need if there are budget over-runs.’’

It also pays to understand what will add value to your property. Kitchens and bathrooms are considered good areas to invest in as they sell houses, Alexander says.

‘‘Things such as street appeal or enhancing the indoor/outdoor flow are also good areas for those who are looking to upgrade their property and realise potential value down the track.’’

‘‘It can be a good idea to take advantage of low rates to have a real shot at paying down debt to get yourself into a better financial situation.’’ Hamish Patel