The end of 2020 is fast approaching, and it has certainly been a year filled with surprises. It’s somewhat been accepted in the industry that low interest rates are here, and here to stay.

In fact, there have been further forecasts recently around interest rates dropping even lower than they are now. With the Election over, our attention now shifts toward the future and how this looks from an economic perspective, focused particularly on our recovery and what shape this may take. The interest rate market will have a significant impact on this, so how things are managed will be important.

The big talk going on now around mortgage interest rates is certainly Heartland bank’s 1.99% interest rate, fixed for one-year. This is the lowest mortgage rate in the market by circa 0.40%. Most other (larger) banks are currently sitting around the 2.39%-2.45% mark for the same term. This is a savings of around $4,000 per annum, per $1million of debt, so these are not small numbers, or small savings to be ignored.

Homeowners (existing and new) are reaping the rewards of a lower interest rate environment. We are still seeing that the one-year rate is the most attractive to borrowers, all whom have the expectation that it won’t be long before rates are even lower - and we tend to agree. In a lot of cases the six-month rate is slightly too high to be attractive, although this term is probably the most ideal, assuming interest rate forecasts are accurate.

Heartland’s home loan rate was the lowest in New Zealand history, and other banks are very likely to follow – although to what extent, and how quickly, is yet to be seen. In addition to their marketleading one-year rate, Heartland are also offering 2.35% for two years and 2.45% for three years. Other banks are sitting close to this three-year, when looking at Westpac’s 2.49% for one/two/three-year terms, and SBS also have the same and for 18 months.

Funding For Lending Programme

Something else borrowers should be aware of is the Funding for Lending Programme (FLP) which is a new powerful tool that will inject billions into our financial system and could see interest rates pushed even lower. This programme is expected to launch in November of 2020 and gives the RBNZ the opportunity to lend cash from the recent QE directly to commercial banks at special rates – as opposed to only providing a wholesale lending facility (which it does with the OCR). Allowing commercial banks funding at lower costs would mean they could further cut rates, however of course this would be better for borrowers than it would be for savers – as it could also push term deposit rates lower.

Even with where things are at today, we have seen many homeowners in stronger positions due to the lower interest rate environment, as rates have dropped roughly 0.80-1% since the beginning of the year, and this has certainly caused significant activity in the property market. Further interest rate cuts will only continue this trend, which is positive news in this economic environment.