Publication: nc08022012

With earthquakes at home and turbulent international markets interest rates are looking decidedly low, and economists are expecting this to remain the case for some time yet.

ASB economist Jane Turner says interest rates are likely to remain low over the coming year and this could continue on into 2013. “We expect uncertainty in global markets will mean the Reserve Bank will leave the Official Cash Rate (OCR) on hold at 2.5% until at least December.” 

Ms Turner says that while the low OCR is good news for borrowers, this presents a problem for retirees and investors.

“Low interest rates obviously create a challenge for investors. However, we’re noticing bank funding has increased in New Zealand and Australia, and this has meant increased competition between banks.”

She says that banks aiming to attract retail deposits with competitive interest rates is a good opportunity for investors and has somewhat “softened the blow”.

For homeowners paying off their mortgages, the forecast is looking bright. However, taking time to consider your options could save you in the long run, says Institute of Financial Advisors president Nigel Tate.

“If you’re on a fixed-term mortgage it probably costs quite a significant amount to break it. You have to look at the negatives. Consider the fees, and the interest rate at the end of it. Sometimes it is better sense to see it through.”

Mr Tate says there is no right answer as to whether people should stick with higher repayments or not. 

“The most important thing is to have good open communication with your provider. Banks obviously don’t want to lose people to the bank across the road, so you can end up with a better deal.”

Rick Mooney of Leaders Lower Hutt says lower interest rates are bringing investors back into the market because property returns are up. “Rental returns can be around 6.5 per cent in the current market on some properties, especially units and smaller properties.”

“For people buying their first home, lower interest rates mean they can pay more. So the gap between what buyers will pay and what sellers want tends to narrow.”

Mr Mooney says unemployment is the biggest factor affecting the market. “While the year has started really well with buyers willing to make decisions, it is still not unlike last year where things went well until around March before the bad news kicked in.”

“If job prospects stay positive despite Government plans to keep making cuts, then we should be in for a much more positive year.”