With the Official Cash Rate down to 0.25 percent in an attempt to stabilise the economy as a result of coronavirus, borrowers are in the box seat to pay off debt at minimal cost.
Banks moved quickly to announce their intention to pass on the full benefit of Monday's cut, but according to Squirrel chief executive John Bolton, around 80 percent of homeowners won't see an immediate result.
"Fixed rates won't drop as much as floating rates: most people will be on one and two-year fixed rates [meaning] they'll have to camp out and wait," Bolton said.
As it costs money to break fixed rates - and the Reserve Bank has signalled that the rate cut will be in place for at least 12 months - in general, breaking an existing loan to get onto a lower rate is unlikely to provide much benefit.
"As most homeowners will have at least part of their loan rolling in the next year, [they'll] get the opportunity to lock in some incredibly low rates," Bolton added.
Bolton said that as they're cheaper, choosing a fixed rate is generally better than keeping the mortgage on floating. For mortgages due to roll over, Bolton suggests re-fixing a rate from next week (people can check with their bank on when the new rates take effect).
"I think we're going to see fixed mortgage rates below 3 percent, but not a full 0.75 percent drop," Bolton said.
EnableME director Hannah McQueen said that her suggestion would be to look at a 12-month fixed rate, bearing in mind that the longer people stay on a floating rate, the longer they're paying a higher interest rate.
"Set up a portion [of the loan] to repay faster over the next 12 months, "McQueen suggested.
"This portion should be set up as a revolving credit facility that you don't have credit card access to, so it provides flexibility: the amount should be linked to your expected cash surplus for the year," McQueen added.
Following Monday's drop to the Official Cash Rate, several banks announced new home loan interest rates to take effect during March and April. Among those are:
- ANZ: 4.44 percent (floating), 4.55 percent (flexi)
- Kiwibank: 4.40 percent (floating and offset), 4.45 percent (revolving credit), minimum 20 percent equity: 3.45 percent (fixed one-year), 3.39 percent (fixed two-year)
- ASB: 4.45 percent (floating), 4.55 percent (orbit)
- Westpac: 4.59 percent (floating and offset), 3.39 percent (fixed one-year)
- BNZ: 4.55 percent (floating), 3.49 percent (classic fixed one-year - unchanged).
Tools to help homeowners in difficulty
Control of the spread of Covid-19 could affect work patterns - and possibly income - as changes to work days, reduced hours or working remotely are a possibility. For those feeling vulnerable in the current environment, there are resources available to help.
"To help people get through [this period], now is the time to free up as much cash flow as possible," Bolton said.
Among the options to free up funds are to change mortgage repayments to interest-only and to put KiwiSaver contributions on hold.
"In the current environment, my expectation is that banks should [allow] interest-only repayments.
"Another option for people feeling the pinch is to go on a KiwiSaver holiday," Bolton suggested.
If borrowers are undergoing hardship, Bolton said that there's plenty of tools to help people if they need it: the key message is for borrowers to be proactive.
"If you're going to end up in a tricky situation, get on the front foot and talk to your lender early," Bolton said.
"Don't leave it until you're missing loan repayments and don't put your head in the sand.
"If you lose your job, you can apply for 'hardship' and get a repayment holiday on your loan," Bolton added.
In the current environment, McQueen's top tip for borrowers is to get professional advice and develop a plan to improve their financial situation.
"If we move into [prolonged] recession, access to bank lending could get tougher, so if your strategy to grow wealth involves leverage, you need to have a clear plan you can execute with confidence.
"For those who are financially resilient, there are a lot of opportunities available," McQueen said.
