As lock-down level two ends for most of the country, and Auckland is still left on level two, we’re focused on the fact that New Zealand has officially entered a recession.

Key information from various sources highlights that the released Q2 data shows activity has in fact recovered faster over the second half of the quarter as we saw the lockdown restrictions reduced to lower alert levels. It will be fantastic to see a similar set of data in the coming months for the country as we move out of the alert levels we’ve seen recently in place.

Many commentators are suggesting that a negative cash rate (OCR) is inevitable, and I’ve personally been speaking with clients who are working directly on assisting banks in getting their infrastructure ready to cope with a negative interest rate market.

While the OCR will need to go a long way negative before we see term deposit rates and mortgage rates drop into negative territory, it is simply something lenders need to be ready for, and my understanding here is that they’ve been given until December 2020 to get this underway.

While the cost of borrowing is down, the property market has been going ballistic, both in terms of prices and how long properties are staying on the market. Auction clearance rates are increasing too with stats in the 80% range from some agencies. We’re all aware of the dramatic effect that interest rates can have on asset prices, and this is something that has been affecting prices in many markets around the country.

Cost Of Borrowing Drops

As outlined last issue, the cost of borrowing has dropped for many rates somewhere between 0.25% to 1% depending on the lender, in as little as six months. Earlier this year many borrowers would’ve been happy with a mortgage rate in the threes – that is simply not the case at the moment. If it doesn’t have a two, many borrowers are fighting their banks for better rates or going elsewhere.

While we haven’t seen any drastic changes in residential mortgage interest rates in the last month, we’re seeing further reductions in certain areas – for example you can get a one-year rate from most major banks at around 2.49%. I have even heard of some lenders offering 2.45% to clients too – which indicates further drops are on the horizon. There are forecasts from some banks such as ASB that it wouldn’t be surprising to see interest rates in the mid-high 1% range by next year – for short-term fixed rate options.

Longer-term debt still seems to be sitting around the 3% mark. As it is often somewhat based on what occurs overseas, it’ll be interesting to see how other economies cope with the months ahead – including Christmas around the corner, and of course the US election later on this year. I would imagine we may see some changes in the longer term fixed rates later on this year.

For many borrowers the shorter-term fixed rate options are definitely attractive, just keep in mind that if you are carrying a significant amount of debt, you may want to hedge your bets with some longer term lending too, so you can get the best of both certainty, and price.