What Home Owners Should Do While Interest Rates Stay Low
The end of the record low interest rate era seems to be looming, so it might be worthwhile for many homeowners to think about how to take advantage of the low interest rates while they can.
After several years of falling mortgage rates, which have left an average of one to three year fixed rates between 2 and 3 percent, economists are forecasting interest rate hikes as soon as the Reserve Bank begins to raise the official cash rate (OCR).
Westpac now expects the OCR to increase from August next year, while ANZ expects an increase next February and Kiwibank selects an increase in May.
Long-term home loan interest rates are already rising.
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Westpac’s incumbent chief economist Michael Gordon says his team anticipates floating rates and shorter fixed rates will be stable over the coming months.
This leaves homeowners a window of time to improve their situation with low rates. Possible ways of doing this are to refinance a mortgage to get better terms or to take out more loans, to trade in real estate or to take out loans for renovations.
AdviceHQ director David Green says now is a good time for homeowners to review their financial structure and arrangements, especially if they have not done so in a while.
For some, this could result in a refinancing decision that could save thousands of dollars in interest payments and reduce debt. It is necessary for people to consider what is the best option for them and how it can be most effectively achieved, he says.
Sometimes there is a break fee to pay, which can be substantial when the new tariffs are much cheaper.
“While this can mean simply refixing existing loans at a lower interest rate, it can also require a purchase if the existing bank does not comply with the refinancing conditions. Some of my clients have had to do this lately and have ended up in a much better position. “
More and more people want to tie up loans for longer, he says. “As the gap between short-term and long-term rates widening, people want to take advantage of current long-term rates before they go any higher.”
Using lower rates to swap for a more expensive property is another option for people who want a larger home to better meet their needs or are moving to a different area.
Some of Green’s clients have recently done so, with one client taking a huge leap to the top and moving from a $ 1.5 million property to a $ 3 million property.
This particular case is situational, but such a step is not free, he says. “There are costs. But when done successfully, it generates value and equity, so it can be a beneficial move. “
However, there can be problems trading in a rising market.
Mortgages Online director Hamish Patel says house prices have changed so quickly that homeowners can easily get caught looking to buy a property after they’ve sold their property.
“It is a mistake to believe that because you sold your property for a good profit, you can automatically swap it for a more expensive house and take your time. I’ve had a number of customers who have done that and the market has passed them by. “
They had to compromise on the type of home they bought or the area they bought, or they paid a lot more than planned and took on more debt for it, he says.
“To avoid this, people have to be realistic about what they want and what they are willing to pay for the exchange – before they sell their own property. They also have to do their homework, look at the actual sales data and base their decision on it. “
Patel says current interest rates shouldn’t have an impact on long-term financial decisions, such as buying a more expensive home that brings long-term debt with it.
“On the other hand, it can be a good idea to take advantage of low interest rates to have a real chance of paying off debt and getting yourself into a better financial position.
“If you are able to pay off the additional debt over a period of about five years, another sensible option could be to add a low interest rate to your loan to add value to your existing home.”
Often people only renovate when they want to sell, he says. “But in the current market, renovating and holding means adding value to the property and homeowners can enjoy the lifestyle benefits.”
Data suggests that more people are choosing to upgrade their existing homes than to convert to another property. While 27 percent of respondents in the current NowNext survey by Stuff were planning renovations, only 17 percent were thinking of moving.
An analysis by the Real Estate Institute also shows only a marginal increase in the share of sales of larger (200 square meters and more) properties from 20.9 percent in May 2020 to 22.1 percent in May 2021.
Acting executive director of the Real Estate Institute, Wendy Alexander, says the Kiwi’s attitudes towards their homes have changed since emerged from the level 4 lockdown in late April last year.
The number of people renovating their homes or adding amenities like spa pools or blinds has seen a significant surge, and part of that is people taking advantage of the low interest rate environment, she says.
“We’re not financial advisors, but our recommendation to people is not to get too much debt from a borrowing perspective and be aware that interest rates can go up at any time.
“Before undertaking major renovation or modernization projects, it is worth discussing with your bank how much the renovation could cost and whether you need any emergency measures if the budget is overrun.”
Understanding what adds value to your property is also worthwhile, as kitchens and bathrooms are considered good investment areas as these spaces sell homes, says Alexander.
“Things like making the street more attractive or improving the internal and external flow are also good areas for those looking to upgrade their property and realize potential value on the route.”