Mortgage rates tipped to drop below 2 per cent

Interest rates are likely to fall further and mortgage interest rates will soon fall below 2 per cent, according to Fergus McDonald, head of bonds and currency at Nikko Asset Management.

“I still think there will be a further round of mortgage rate reductions,” McDonald said on a webinar. “Banks are awash with cash and they can borrow as much as they like from the Reserve Bank at 0.25 per cent. However, they’re having trouble lending in any volume.”

McDonald pointed to Government measures aimed at cushioning the economy through the Covid-19 crisis, such as the loan scheme for small businesses administered by the Inland Revenue Department and to the business finance guarantee scheme (BFGS) that’s administered by the banks.

The IRD scheme has processed 88,000 applications and lent $1.48 billion with an average loan size of $16,776.

The Government allocated $6.25b to the BFGS and the latest figures available from the New Zealand Bankers’ Association show that at June 8, the banks had lent just $86 million — these numbers are expected to be updated in the next few days.

McDonald suggested that the Government wage subsidy schemes — the latest one runs through to the beginning of September — may be sufficient support for the businesses that needed help.

But the Reserve Bank has made it clear it stands ready to do whatever is necessary to support the economic recovery, he said.

A fall in mortgage rates below 2 per cent would also help small businesses, many of which use their family homes as security for business loans, he said.