Gazing into the Crystal Ball (Interest Rate Edition)

Gazing into the Crystal Ball
(Interest Rate Edition)

Happy Friday everyone! It’s only ten days away from Christmas and the season of family, friends & laughter is upon us. Usually around this time of year the crystal ball begins to surface, and clients are often asking me what I think on the property market and interest rates.

Trouble is, I don’t have a crystal ball… and nobody else does either.

Today’s focus is on interest rate expectations for 2019. I’ll also show a method for assessing whether a rate is a good value or not and how to take advantage of the current interest rates.

  • We expect interest rates to remain stable over 2019. 12-month rates have ranged from as high as 4.39% to as low as 3.95% across the main banks this year. They’re currently around the 3.99-4.05% territory and we expect a range of 4.05-4.19% for 2019 term.
  • Best value interest rates will still likely be the 6, 12, 18- and 24-month terms.
  • There is a possibility of banks extending the property investor interest rate margin by an additional 0.10% over and above the current premiums. BNZ has launched this policy in October 2018 in line with ASB & Westpac. Banks need to hold more capital against property investment properties so they can recover their profit margins with the added premiums. The recommendation is to extend overall fixed interest rates on your investment lending now to minimize the risk in the market.
  • As at the time of writing, the current 90-day wholesale rate is 2.04%, therefore, even if the RBNZ raise rates from 1.75% to 2.00% in 2019/2020 this would have minimal to no impact on interest rates. The primary factor in interest rates is the margin allocation towards what the banks deem as riskier loans i.e. investment properties.
  • Interest rates are still at their all-time lows.
    So how do you take advantage of this and how can you tell if it’s a good offer?

    With every  fixed rate renewal we’re requesting break feesfrom the lender on all remaining loans. We then compare those break fees withthe interest savings from the old rate to the new rate, multiplied by theremaining loan term.

    This creates an interest/break fee arbitrage opportunity which sometimes worksout in your favour and sometimes it doesn’t. It’s an essential exercise to gothrough as if it works out well it can be a substantial savings. One clientthis week has saved over $1,500 over the remaining 12 months and we evenextended their fixed rates onto a longer period!

    How to compare interest rates.

    Let’s use a case study as an example.

    1YR: 4.05%
    2YR: 4.15%

    Which is the better rate?

    You can break down the 2 YR rate as a 1YR rate + 1YR rate in 1 year’s time.
    4.15% = (4.05% + 4.25%)/2

    If you think there is a chance that the 1 YR rate will be greater than 4.25% in a year’s time, then the current 1 YR rate is good value. If you think the 1YR rate will be less than 4.25% in a years’ time, then the 2YR rate is better value. If you’re on the fence, then adequate interest rate averaging must take place in your loan structure to manage the risk. Our clients often have loans on various terms because the truth is, we cannot truly predict the market, therefore, must make the best decision possible relativeto the situation at hand.

    For your own practice, let’s say you were offered 4.39% for 3 Years. What sort of 2-year rate would you need in a years’ time to breakeven?

    Christmas and the holiday season is often an expensive time of year. An introduction to us could possibly identify thousands of dollars of savings for someone who’s mortgage has never been reviewed.

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