Buying property when NZ home loan interest rates are low
With low home loan interest rates in NZ, it can be tempting to jump into a purchase. But what if things change?
House hunting in a low interest rate environment is a good position to be in.
Paying less interest on your home loan means you feel you have greater purchasing power than in less interest rate friendly times.
But, while interest rates may be at an a historical low, home buyers will need to work hard to satisfy banks that they’ve got a stable income. In fact, it can be harder to get home loan pre-approval than in more 'normal' circumstances as banks require greater assurance that your job is secure, and may ask for a larger deposit.
“We all love lower interest rates because it’s easier to service a mortgage, but the big thing is whether you have a job,” says economist Cameron Bagrie.
With this in mind, here are some questions to consider.
Is it actually a good time to buy a house?
Don’t be taken in by the hype around historically low interest rates, warns Geoff Bawden, mortgage advisor with Bawden Consulting. You shouldn't jump into a purchase – research remains key.
However, if your income is stable, it can be a good time to buy a home.
It’s a good time to buy, especially in Auckland, as long as you're in a position to hold the property for three to five years, adds Gavin Lendich, an experienced mortgage advisor with Mortgage Planners.
In this kind of economic setting, first home buyers can particularly benefit from the situation, and are able to lock in at favourable rates, says Mr Bawden.
Another group able to act immediately are those on floating interest rates who can move to a fixed rate.
First home buyers, in particular, can benefit from low interest rate environments.
Which is better, a fixed or floating interest rate on your home loan?
One of the biggest decisions to make around NZ home loans is whether to go fixed or floating. You should discuss the pros and cons of both situations thoroughly with your mortgage advisor.
You may decide to opt for a mix of fixed and floating, although in a low interest rate environment, the fixed interest rates can be highly appealing partly because of the certainty they provide.
“The beauty of fixed rates is they will offer you a period of stability from which you can budget,” says Mr Bawden.
Whether you choose to fix or float comes down to the personal individual’s circumstances, says Mr Bagrie.
“One size does not fit all. You need to be careful about putting people in a box,” says the economist.
Differences between fixed rate and floating home loans
Fixed interest rate loans
If you take out a fixed interest rate loan, the amount of interest you pay stays the same for the whole term.
The advantages fixed term home loans are:
- Being able to hold onto lower rates if interest rates are rising.
- There will be no nasty surprises, and you know exactly how much each repayment will be.
- Lenders frequently offer special deals on fixed rate loans.
However, there are also downsides of fixed term loans, which include:
- If floating interest rates drop below your fixed rate, you won't be able to take advantage of reduced payments.
- There are often charges if you want to raise your repayments.
- If you sell your property you may be charged a break fee.
Floating interest rate loans
A floating interest rate loan will respond to changes in the wider market, meaning the amount you pay will vary.
The advantages of floating interest rate home loans are:
- Flexibility – you'll be able to change the loan terms or pay off the loan early without being charged a penalty.
- You'll be able to combine other, more expensive, debt into your floating rate loan by borrowing more.
The disadvantages of floating interest rate home loans are:
- You're vulnerable to rising interest rates, meaning your payments will go up.
- Rates are generally higher when compared with fixed rates.
How long do I fix for on my loan?
In a low interest rate environment, it’s tempting to lock down a fixed rate on your home loan for as long as your mortgage advisor will let you.
The advice will vary depending on who you’re working with and what risk you’re comfortable with.
Even though it may be tempting to lock in at a low interest rate for five years, Mr Lendich says, he still advises his clients to fix for a maximum of around 18 months.
Mr Bawden is more open to fixing for three or more years in an ultra low interest rate environment for certain clients.
“Why not fix for the long term? If it starts to correct itself sooner, then there’s been a window of opportunity,” he says.
Meanwhile, make the most of these low interest rate conditions to reduce debt, suggests Mr Lendich. Instead of paying the minimal mortgage payment, set the payment at what you can afford rather than what you're allowed to pay, he says.
When arranging a loan with a homeowner to-be, banks set a rate at a higher level and approve at that level. They use this “notional rate” to make sure there’s headroom between what someone is paying and the going rate. This varies from bank to bank.
You should speak to your mortgage advisor about the different home loan options you have.
Low interest rates won’t last forever
The two things to be aware of in a low interest rate market are to be comfortable about your continued income and to be aware that while interest rates are at record lows, they won’t last, says Mr Bawden.
In other words, what goes down must come up.
“You need to be mindful, if at some stage the rates do rise, that it’s going to be to a level which you can afford comfortably,” he says.
In a low interest rate market, there’s opportunity but proceed with caution, is the message.
*We hope this article has provided some helpful information. It's based on our experience and is not intended as a complete guide. Of course, it doesn’t consider your individual needs or situation. If you're thinking about buying or selling a property, you should always get specific advice.
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