On Wednesday the Reserve Bank of New Zealand announced the second official cash rate (OCR) cut of 2019 – and it cut hard, with a 0.5% reduction from a historically low level of 1.5%, to a new, even more historically low level of 1.0%, citing growth headwinds and inflation levels remaining low. In particular they’ve focused on global economic activity as reducing demand for New Zealand exports and ongoing easing monetary policy from global central banks.
While a cut was expected, the size was a particular shock, with the New Zealand dollar tanking over 1c against the USD. ASB immediately cut their carded floating rate by the full 0.5%, and tweaked their two-year rate down slightly to 3.75%. BNZ has basically done the same; Kiwibank has passed through the full cut on floating rates but haven’t reduced their fixed; Westpac has passed through 0.45% floating and none fixed.
ANZ have been particularly aggressive, dropping their 1-year rate to a market leading 3.69%. They’ve also dropped term deposit rates by between 0.1% and 0.25%, with most of their deposit rates now below 3%. Expect to see more rates moving around over the next week or so as banks jostle for position.
Rates like these would have seemed like fantasy only a few years ago. If you’re taking out an 80% mortgage on a roughly median-priced house in Auckland today ($940,000) and fixing it all for 2 years, you’re paying in the ballpark of $14,000 per year less in interest than you would have been five years ago when the OCR was sitting at 3.5%, depending on where retail rates settle to after todays mega cut.
The downside of all this cheap debt is, well, cheap debt. Great if you’re a borrower – pretty tough if you’re a lender. Few tears for the banks I’m sure, but for those out there looking to invest their cash in relatively safe, low volatility term deposits or high quality bonds, you’ll be lucky at this point to be beating inflation. Even before the rate cut announcement, Kiwibank and Westpac were making minor rate cuts, and most deposit rates are sitting at or below 3%.
If you have a mortgage
Well, no question that now is a great time to be a borrower. Its incredibly cheap to borrow money right now, and while bank lending criteria is tight by the standards of recent years, it’s fairly straightforward if you’ve got a safe income and your debt is under control; are sensible with your spending; and you’re in a good equity position. My take – use cheap money to your advantage, but don’t get yourself into trouble. For example:
- Consider lifting your principal repayments a little, particularly if you’re only marginally below the 80% LVR mark – and definitely if you’re above it – while debt is this cheap, you’ll make much more of a dent in the principal.
- If you’re confident in the security of your cashflow, and you’ve got a good level of equity, give serious thought to starting to steer some of your excess cashflow into other forms of investments. This depends on a whole raft of things – your risk appetite, your age and life stage, goals and how far away you are from achieving them – but it does make sense for some people.
- Is now a good time to buy? The million-dollar question – specifically, in Auckland, its a $1,025,389 question! My take? With property prices slowly declining and rates so cheap, now could be a good time to secure a new home. My one warning – watch your cashflow. Cheap debt will help households weather lower prices, but it may not last forever, and if rates start to climb and unemployment starts to spike, then it could put serious pressure on mortgage servicing. Stress test your lending for loss of income or a spike in rates.
If you’re close to being mortgage free – and again if your cashflow position is strong – banks will be throwing money at you at the moment. Again it depends heavily on your situation, but using the equity in your home to leverage into other things – investment property, your own business, or even just a home upgrade or renovation – are all reasonable option.
If you’re mortgage free and looking for yield
Well, its becoming pretty hard to find high quality cashflows at a low level of risk for a reasonable price nowadays, and the second, major OCR cut of 2019 isn’t going to help much. If you’re a retiree, saving for a house deposit, or just need to park some cash for a few years for the short to medium term, options are becoming tight. Some general thoughts:
- Make sure you’re not leaving any more cash than necessary in bank savings accounts. In real terms, money in a savings account is essentially going backwards.
- Consider diversifying away from cash and term deposits. Allocating a small percentage of your portfolio to higher-return asses can help life overall performance – just be aware that it’ll come at the cost of higher volatility, so don’t go overboard.
- Managed income funds that hold a blend of cash, bank term deposits, government and high quality corporate and infrastructure bonds can be a good option that will help lift return – again, they’ll come with higher risk, so be aware of the tradeoffs.
- Don’t take on costly debt – you’re better off spending capital than using a credit card.
These are some general thoughts and shouldn’t be considered personalised financial advice. If you’d like to have a chat, book in a free consultation – we’re always happy to talk.
Where to from here?
There is no question we’re heading further into a low-interest world, with many bank economists forecasting a further OCR cut in 2019 – some suggesting the central bank rate could go as low as 0.75%. House prices are looking pretty weak, particularly in Auckland, and while employment data was surprisingly strong this week, global threats such as trade are creating enough uncertainty that rates are almost universally expected to remain lower for longer. A key challenge is that central banks are starting to become locked into a continuous “race to the bottom” – if one cuts, the others soon follow.
Low borrowing costs will make life easier for those with mortgages, but with housing prices slowly moving backwards, pressure on household cashflow will be a key metric to watch. Savers are likely to be squeezed further too, and a key challenge will be extracting yield without taking on unsustainably higher levels of risk!
We welcome comments, thoughts, questions – or coffee chats. Drop us a line if you’d like to have a chat about anything mortgage or investment related.