Podcast: Interest rates Tumble to 2.65% ... Where are the Best Rates Today? | Ep. 258

Posted by Ed McKnight on 27/05/20
Interest rates Tumble to 2 65 Where are the Best Rates Today 001
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Show Notes

What's Covered in the Show?

In this episode, we discuss current interest rates, along with which banks currently have the best deals. Beyond, that we also talk through what this actually means for property investors over the short and medium-term within their cashflows.

As usual, we also make a few predictions about where we think the market will head.

We also mention our current podcast survey. We want to make sure that this is the best show in the world about investing in New Zealand property ... we love having you on the journey and we can't wait to get your feedback. Once you've taken the survey we will send you your very own Property Academy Podcast mug.

Transcript

Transcript of the Podcast

Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and today on the show we're talking about interest rates and what's happening with interest rates at the moment. So, Andrew, let me ask you this. What's up with interest rates?

Andrew Nicol: Glad you asked Ed. Nothing at all.

*cricket noises

Ed McKnight: Okay. Sorry about that.

Andrew Nicol: Everything is on its way down. So as of the recording of this podcast on the 25th of May, we are seeing some record low interest rates, they have never, ever been as low as they are today, and I spoke to Tony Mounce mortgages.

Tony is a good friend of mine, he is the largest broker in the South Island, and he said that he's never seen anything like it in his it must be almost 40 year career. And, last week was one of the more interesting weeks in his career, which is saying quite a lot for someone that's been in banking for 40 years, not much interesting really would happen in that. And so he was telling me about some of the bank wars that are going on at the moment.

So BNZ today bought out the lowest three, four, and five year rate. So they've bought them down to 2.99, so under 3% for five years is amazing. I've never seen anything like it.

So if you're wanting complete certainty around your repayments, that might not be a bad option. However, you can get some pretty good lower one and two year rates. So ASB has got the lowest two year rate since I'm working backwards. 2.69 for two years at ASB.

Kiwibank as of today, have got a one year rate of 2.65. So they are down and they're going down more. And we expect to see quite a lot of competition now as banks are trying to build market share, particularly Kiwibank.

So Kiwibank, is really trying to improve their market share in the mortgages. And so they will likely bring their rates down even further. BNZ are being pretty tough at the moment, but their rates are pretty attractive. So if you can get a loan from them that I could understand if you wanted certainty fixing for a five year.

Now, my general advice and Tony's advice at the moment is don't fix for any longer than a year. He knows that I like certainty particularly because I deal in investment and I, a lot of my clients will go with the five-year rate to have a longer time of certainty in terms of their contributions. But he is absolutely assuring me that one year is still the best rate because they've got a long way to drop it before they hit the bottom.

And again, we believe that interest rates are going to be low for a sustained period of time. The Reserve Bank has indicated that there's still a lot more to happen in the market before they look to put those up and there is still the talk of negative interest rates. When that happens, or if there happens, no one knows for sure.

But I imagine it will, and that kind of leads me into my next topic, which is how easy is it to get money right now? And so BNZ, for example, have as we did a podcast maybe last week on BNZ's lending criteria. They've gone completely against what the Reserve Bank have tried to do, which is encourage banks to lead more money.

They have gone to harder criteria than before the LVR restrictions were lifted. So that's really interesting. On the other hand, Kiwibank have said that they are open for business. They will do 80% on an investment property and they'll do up to 95% for an owner occupier, first-home buyer. That's golden.

So they are being the most aggressive in that space. Again, trying to get market share. BNZ are maybe the anomaly. And the reason for that is because they're for sale and they're going to want to keep their book looking as good as possible to get the maximum money for their sale.

And also, there's a good chance that if they are for sale then NAB, who owns them in Australia is probably not issuing them with a lot of extra capital to be investing out.

If the Reserve Bank creates a negative interest rate situation, then you can imagine that banks will have to get a return on their money for investors, for shareholders.

And so what will happen then is they will lend more aggressively. So I do think, given that other banks have been pretty coy about making any changes to their credit policy, I mean, we expected to see it in the first week, and, and only seeing Kiwibank is pretty shocking at this rate.

I expect that the Reserve Bank will certainly reduce the rates so we do have negative interest rates that will really push those banks to get money out the door.

Ed McKnight: And I've got a couple of comments as well. I mean, I just want to want us all to pause for a minute and realise how big these interest rate decreases are.

When I joined Opes about 12 months ago, almost, interest rates were about 4%. Now that decreased to 2.65% for the one year rate decreases the interest costs on a 500 K mortgage, a half a million dollar mortgage from 20 K down to 13.25 K that's the saving of a real cash saving compared to this time last year of $6,750 that's $129 a week.

So over the last year, what we've seen then is properties that used to be quite heavily, negatively geared, a growth property say in Auckland is now cashflow neutral or only very slightly negatively geared. We've seen properties that were $50 negatively geared 12 months ago to being positively geared.

Now I think because of this, we are probably not going to see ring fencing being rolled back. I just want to harken back in or promote I suppose, something the Auckland property investors association were doing, they were trying to get ring fencing rolled back because of Covid 19.

I don't think we're going to see that because interest rates have decreased by so much, and that's allowing the costs, the main cost finance, for property investors to be continually decreasing.

Arguably, if I was the Labour party, I'd say, well, actually, investors probably don't need that additional cash flow or savings simply because interest rates have gone so low and arguably, if people aren't making tax losses to the same degree, ring fencing doesn't help as much because it only helps if you've got a quite a heavy tax loss.

One thing that I just want to mention and pick up that Andrew had mentioned, is that the long term interest rates with BNZ out to five years are really, really low.

Now, I know one of the biggest concerns, because it was one of the most popular episodes, is that interest rates are going to increase over the long term.

Well, when banks, long term interest rates are really low like they are today, that suggests that the banks are thinking that actually the interest rates are going to be low for a long time if they thought interest rates were going to go up in five years that have a higher interest rate on it, am I right to be saying that?

Andrew Nicol: Yeah, that would make sense to me as well. And actually I did some quick exercise of quick numbers as well as I was talking to one of my clients today who's based in Queenstown and she has a property management firm.

They've noticed about a 28% drop and rents there, which is pretty consistent with Tony Alexander's report, talking about 30% reductions in rents overall.

So I did some quick numbers based on properties that I've seen there.as investments. So for a million dollars, you'd normally get about $1,200 a week rent, so you get a really good yield.

And, if the interest rates have dropped from where they were to where they are today, you can expect savings of about $260 a week.

Now, $1,200 a week at 30% losses is $360 so there is still a hundred dollars that you need to top up, but a hundred dollars is quite manageable rather than a 30% drop. If you're wearing that full 360 yourself, that might hurt.

But if you can renegotiate your interest rate, even if it means breaking it and adding the fee on, if it means you're holding that property to weather the storm, I would think that that would be something you would want to consider.

So again, if you're in a position at the moment where ring fencing is come in and it's hindered your ability to hold a property because it's costing you more and or you're noticing a rent decrease because of the area that you own an investment property, you need to figure out a way to weather the storm because if you sell now you crystallise those losses.

So an interest rate break is sometimes a smart thing to do. One last note, I want to make is, because these rates are coming down and rents might be pretty much the same nationwide generally speaking, if you create a cash flow positive property earlier than you thought, you really need to be smart about ways to minimise the on book, so based on your accounting book, your accounting book loss, so you can still have a cash flow positive property.

And I know we're going to talk about this in a couple of episodes, a cash flow positive property that's from the IRD standpoint is negatively geared and one of the major things for that is depreciation.

Now, if you're an investor and you've been an investor for a long time, you'll know that depreciation laws changed back in 2010 where you can't depreciate a house anymore, but you can still depreciate the chattels.

Now, if you get a specialist chattel valuer to go and itemise everything in that property that's able to be legitimately depreciated, then you can supply that with your annual report to the IRD and reduce your gains, your income, your cashflow positive number by the depreciation amount.

And so that might mean that you don't have to pay tax on that positively geared property. So you can keep that money building up in a buffer for when a time that the interest rates do go up.

Ed McKnight: And I just want to mention as well, and kind of put it into a personal situation and say, these decreases in interest rates have real effects on property investors.

I've just re-fixed during the Covid 19 induced shutdown, I fixed for one year with Westpac at 3.09%. Now interest rates have decreased to 2.65% so that's only, I suppose, 0.44 percentage points difference.

Now on that property, I've just calculated over the next year, I will pay an additional $1,390 in interest than if I had waited a little bit, that I wouldn't have otherwise paid. And so that's why I know some people love that certainty and look, if you're willing to pay the extra money for that certainty, that's fine.

But I remember Tony saying as well, not so long ago, fixed for a year because interest rates are kind of heading down that's where we were expecting them to go.

Whatever rate you fix in at, even as it gets lower, it has real world impacts to how much interest you'll pay at the bank, which is again, your biggest expense. If you think about 0.44% which for me, on this property works out to be $1,390. That's basically half my property management. In many cases.

Andrew Nicol: And so Tony Mounce normally says the famous words when he's asked about interest rates. They'll either go up, down or stay the same at the moment, Tony Mounce is saying they'll go down.

Ed McKnight: Fantastic. Hey, now, if you do want your official Property Academy podcast mug, and these are some pretty cool mugs here, carries coffee tea, water, wine, whatever you want

Andrew Nicol: With our mug on them.

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Thanks for listening to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of the New Zealand property market.

Until next time.