What Homeowners Should Do While Interest Rates Stay Low
The end of the era of record interest rates seems imminent, so for many homeowners it might be worth considering how to take advantage of low rates while you still can.
After several years of declining mortgage rates, which have left rates fixed over one to three years ranging from 2% to 3% on average, economists are forecasting rate hikes once the Reserve Bank begins to raise the official rate cash (OCR).
Westpac now expects OCR to start increasing from August next year, while ANZ expects it to increase next February and Kiwibank selects an increase in May.
Long-term mortgage rates have already started to rise.
* Buyers must find an additional $ 200,000 to buy a home, according to data from the Real Estate Institute
* Is it too late to access the property ladder?
* Rising interest rates would lead to major mortgage problems, warns analyst
Westpac acting chief economist Michael Gordon said his team expects floating rates and shorter fixed-term rates to be stable over the coming months.
This gives homeowners a window of opportunity to use low rates to improve their situation. You can do this by refinancing a mortgage for better terms or borrowing more, swapping properties, or borrowing to renovate.
AdviceHQ director David Green said now is the time for homeowners to review their structure and financial arrangements, especially if they haven’t done so in some time.
For some, this could result in a decision to refinance, which could save thousands of dollars on interest payments and reduce debt. There is a need for people to ask themselves what is the best option for them and how to achieve it most effectively, he says.
Sometimes there will be a breakage fee to pay, which can be significant if the new rates are much cheaper.
âWhile this may mean simply resetting existing loans at a lower rate, it may also require shopping around if the existing bank is not playing the game on refinancing terms. Some of my clients have had to do this recently and have found themselves in a much better position.
More and more people are now looking to lock in their loans for longer, he says. âAs the spread between short and long-term rates begins to widen, people want to take advantage of current long-term rates before they rise further. “
Using lower rates to move to a more expensive property is another option for people who want a larger home to better meet their needs or to relocate to another area.
Some of Green’s clients have done this recently, with one client taking a big leap up the ladder and going from a $ 1.5 million property to a $ 3 million property.
This particular case was situational, but such a move is not free, he says. âThere are costs involved. But, if done successfully, it generates added value and fairness, so it can be a beneficial decision to make. “
But there can be problems trying to trade in a rising market.
Mortgages Online director Hamish Patel said house prices have moved so quickly that it’s easy for homeowners to get caught looking to buy a property after selling theirs.
âIt’s a mistake to think that because you sold your property for a good gain then you can automatically trade it in for a more expensive home and take your time doing it. I have had a number of clients who have done this and the market has overtaken them.
They ended up having to compromise on the type of home they bought, or the area they bought in, or they paid a lot more than they expected and took on more debt to do so, he says.
âTo avoid this, people need to be realistic about what they want and what they are willing to pay to trade – before they sell their own property. They also need to do their homework, review actual sales data, and base their decision on that.
Patel says the current interest rate situation should not affect long-term financial decisions, such as buying a more expensive home, which involves long-term debt.
âOn the other hand, it may be wise to take advantage of low interest rates to have a real chance to repay your debts and put yourself in a better financial situation.
“If you are in a position where you can pay off the additional debt over about five years, another reasonable option might be to borrow more on your low rate loan to upgrade your existing home.”
People often only do renovations when they plan to sell, he says. “But, in today’s market, doing a renovation and keeping means that value is added to the property and owners are enjoying the benefits of the lifestyle.”
Data suggests that more people are choosing to retrofit their existing home than to move to another property. While 27 percent of respondents to Stuff’s recent NowNext poll planned to make renovations, only 17 percent were considering moving.
Likewise, an analysis by the Real Estate Institute shows only a marginal increase in the percentage of sales of larger properties (200 square meters and more), from 20.9% in May 2020 to 22.1% in May 2021.
Real Estate Institute Acting Managing Director Wendy Alexander said that since the release of the Level 4 lockdown at the end of April last year, Kiwis’ attitudes towards their homes have changed.
There has been a significant increase in the number of people renovating their homes or adding amenities such as thermal pools or louvers, and this is in part due to people taking advantage of the low interest rate environment, she says.
âWe are not financial advisers, but our advice to people is not to take on too much debt from a borrowing standpoint and be aware that interest rates can go up at any time.
“Before embarking on any major renovation or upgrade project, it is worth discussing with your bank the cost of the renovations and any contingencies you may need if you are going over budget.”
It’s also helpful to understand what will add value to your property, with kitchens and bathrooms seen as good places to invest as these rooms sell homes, Alexander says.
âThings like street appeal or improving indoor / outdoor flow are also good areas for those looking to improve their property and realize potential value on the track. “