The Christmas break is behind us and now into the new year, we wait in anticipation for what 2021 holds for us, particularly given how eventful 2020 was.

Looking forward however, as we focus on the interest rate side of things, we are seeing lower rates than we ever have historically, which has assisted in fuelling record levels of borrowing (among other things such as loan-to-value ratio restrictions easing - and later tightening to settle things down).

Main bank floating rates vary from 4.40-4.59% for most banks, except Kiwibank who still currently hold the lowest floating bank rate in the market since they shaved an entire 1% off for their customers in 2020. In many cases even when other banks include their floating discounts, they are not matching this.

To Float Or Not To Float?

A question we are frequently getting from our clients is: “Is it best to float while waiting for a lower rate?” In many cases it is not. Due to such a large gap between the floating rate and short-term fixed rates, if you are wanting lower rates because you assume they will drop in the short term, you might find that the future benefit you are able to achieve is reversed by the additional interest costs you pay while waiting. For this reason, if you think rates are going to drop it might be worth fixing short term (six or 12 months depending on the rate offered).

With the one-year rate around the 2.39-2.49% mark for most banks, and HSBC Premier as low as 2.25%, it’s very difficult to not opt for short-term lending in situations like this. I would always recommend having a mixture if you have a large debt position and multiple properties/mortgages.

We have seen the longer-term mortgage rates remain relatively stable around the 2.99% mark for five years, with some clients seeing as low as 2.89% in this term. There are many factors at play with regards to interest rate forecasting for the year ahead. The key really will be how economies move forward (locally and internationally) and whether this has an influence on interest rates in the year ahead, and in addition to this the Funding for Lending Programme (FLP) which should have some effect on borrowing in the short-term.

I’ve suggested in the past if you’re focusing on repaying debt quite aggressively, a small portion on floating might assist you with the flexibility to do this, in addition to whatever “additional repayment terms” your particular lender has on fixed rates. I am aware that for many borrowers they are in a position where their mortgage interest rates have dropped significantly as they come off their fixed terms, and they’ve had the idea of keeping their payments the same even when on the lower rate, which reduces more principal at a faster rate.