Your May Fixed Interest Rate Strategy and Market Update

Fixed Interest Rate Strategy – maintain a balance of risk by keeping a portion of your lending on shorter 1 -2 year fixed rates to take advantage of shorter term lower rates however look to lock a larger portion of your lending for at least 3 years to secure longer term certainty at what are still historically low interest rates by NZ standards. Obviously you need to consider your longer term intensions with your property to ensure you don’t fix your funding for longer than you intend to hold the property. Also, ensure you retain a small portion of your funding on a floating rate, ideally a revolving credit facility to maximise your flexibility and interest savings. Talk to the team at Onion to structure your lending to save you potentially $100,000’s in interest cost and reduce your loan term by a number of years.

There are generally one of three approaches taken when choosing a fixed interest rate strategy as follows:

  1. lowest interest rate – price driven
  2. Longest term - safety approach for long term certainty
  3. Risk spread – your loans are split across 2 or more fixed rate terms to spread your exposure across various expiry dates hence your total lending is not exposed to a single market at expiry

Whilst it is entirely personal preference as to which strategy you employ for your fixed rate lending, we favour option 3 above in order to achieve a spread of risk whilst also endeavouring to maximise interest savings. There will usually however be a trade-off between lowest interest rate and risk mitigation in order to achieve a pricing structure that reflects a good balance of economy, long term certainty and expiry spread. This is the approach we have taken with our above recommendation as effective May 2017. Strategies do change as different market conditions constantly evolve hence we update strategies on a regular basis dependent on prevailing market conditions. 

Economic overview

Economic commentators are forecasting a ‘steady as it goes’ approach as move forward through 2017 and beyond although there is likely to be a gradual firming of interest rates over the next 2 – 3 years. This will be influenced by such factors as:

  • The Australian banks parent entities having to meet more stringent regulatory requirements around their exposure to both the NZ and Australian markets and capital adequacy ratios (amount of capital they hold relative to their loan base) which are being stretched as a result of heightened lending activity over the past 2-3 years
  • New Zealand Reserve Bank (RBNZ) also signalling tighter capital adequacy requirements for banks operating in NZ if lending growth continues
  • Banks becoming more reliant on raising money through retail deposits in NZ for which they are having to increase deposit interest rates to attract funds. The RBNZ is concerned about banks becoming overly exposed to offshore funding which traditionally is how they match their short term funding requirements with local lending demand. International markets are more volatile and could place NZ (and Australian) banks at risk if too exposed. Our NZ and Australian banks have good controls in place and typically manage these risks well.   

Demand for bank funding is outstripping their ability to fund this growth from local markets hence the banks are having to impose restrictions on which asset (loan) classes they are lending to resulting in a modification of their lending criteria in some cases. This is particularly pronounced in banks restrictions on lending to developers of land and apartments which has resulted in a number of developments not proceeding, further frustrating the supply of new homes to satisfy continually increasing demand. Net immigration remains at record highs creating significant pressure on supply.

Interestingly, whilst there remains a significant housing shortage in Auckland, buyer demand has waned as investors have been discouraged from the market with the RBNZ introduction later last year of 40% equity requirements when purchasing existing property for investment purposes. This has had the desired result of cooling the market for the time being. Firming interest rates will also have had an impact. New builds are however exempt from the 40% equity requirements and subject to individual bank lending criteria.

In summary, the banking market has tightened somewhat over the past 12 months resulting in a firming of interest rates across the board. Due to the events mentioned above and some quite volatile international influences such as geopolitical tensions, uncertainties still emanating from the Trump election, a new 'unknown' president in Emmanuel Macron elected to office in France earlier this month and a bad debt issue looming for Chinese banks as they prepare to tackle loan defaulters, there is expectation that interest rates in NZ will continue to move up however not necessarily quickly or to any great magnitude. Banks will continue to limit supply and maintain capital ratios to ensure their balance sheets are sufficiently robust to withstand any local or international shocks, accordingly the increasing interest rate trend is expected to continue so you need to ensure you have capacity within your personal budget to accommodate longer term firming in interest rates. We would suggest you factor at least 2% over existing interest rates to stress test your budget and start looking at fixing a good portion of your lending for the longer 3 - 4 year terms to secure certainty if that is important to you.  

All in all, an overall tightening credit market is having an impact on lending being available for both developers and retail purchasers of housing stock however whilst some restrictions are in place, credit is still available and banks are open for business.

As always, the team at Onion are happy to advise you with your home loan requirements and loan structuring at any time. Please feel free to call us on 0800 38 48 48 or enquire here