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20 May 2020

Banks offer Historic Interest Rate Lows

Coronavirus continues to affect the New Zealand housing market, with prices expected to fall, people struggling to pay rent, and mortgage payments deferred in record numbers. The nation's largest banks have come to the party by dropping interest rates in an effort to bring in new customers. Kiwibank was the first lender to offer a historic low rate, with ASB following quickly and both ANZ and Westpac also dropping their two-year fixed home loan rate to under 3%. While the Reserve Bank of New Zealand left the official cash rate at 0.25% in its latest announcement, further rate cuts and quantitative easing measures both remain on the table.

Rates at Kiwibank are currently sitting at 2.99% for one-year fixed rate home loans, with numbers just above and below 3% the new normal for a number of large and small banks. ANZ are also at 2.99% for one-year fixed home loans, with ASB and Westpac rates currently sitting at 3.05% for a one-year fixed home loan and 2.99% for a two-year fixed loan. However, while a lower interest rate environment is good news for many, it comes about due to the threat of future job losses and reduced ability of home loan customers to repay their existing mortgages.

According to Kiwibank general manager of product Nicole Pervan, new sub-3% home loan rates are the lowest ever offered in New Zealand: "Customers with a fixed interest rate expiring within the next month are likely to roll on to a new interest rate 1 per cent lower than their current rate. On an average-sized loan, this will reduce repayments [by] $50 to $70, which will go a long way at this time. Customers have the flexibility to pay off their loan faster or keep that money in their back pocket for a rainy day."

The economic effects of COVID-19 are only just starting to affect the unemployment figures. In New Zealand, the official unemployment rate rose from 4% in the December quarter to just 4.2% for the first quarter of 2020. This number is expected to rise sharply by the end of the year, with most experts forecasting somewhere between 8% and 10% by December. Underemployment is also a huge concern, with lost jobs and less hours worked likely to strain mortgage payments as months turn into years.

The follow-on effects of reduced work opportunities have already been recognised by financial institutions. Lots of people have taken advantage of offers made by banks to defer home and business loan payments for six months, with these people unable to benefit from the historic interest rates currently on offer. According to the New Zealand Bankers' Association, 105,035 loans have already had reduced or deferred payments, with these loans worth a total of $36.9 billion. People who take advantage of these low rates will experience reduced repayments and more flexible conditions as the banks adjust to new market conditions.