Is Heartland Bank's new rate too good to be true?

Old fashioned weighing scales

Over the past few weeks there has been constant chatter around mortgage rates dropping even further. With the Reserve Bank looking to relax their rules, many Economists are expecting the OCR (official cash rate) to go into negative territory, allowing banks to drop their rates, reflecting the margins while not having to worry about deposit requirements.

Heartland bank has taken the first stride by dropping their one-year fixed mortgage rate to 1.99%, putting them in the lead. The next lowest one-year rate is 2.49% currently offered by SBS which the other main banks are more than likely to match.

So how good is the 1.99% interest rate?

As Squirrel’s CEO, John Bolton has described, this offer of 1.99% by Heartland is nothing more than a Honeymoon rate. After reading the terms and condition further, we’ve found that with the mortgage rate of 1.99%, Heartland are not offering any cash contributions when clients sign up.

This cash contribution, which is something that other banks are offering, will be the determining factor on whether or not 1.99% for one year is the best value for money.

A breakdown of the numbers in real terms

Based on the average lending size of $500,000, 1.99% would mean an interest amount of $9,950 for the year, while at 2.49% the interest would work out to $12,450 for the year. However, the main banks would also offer a cash contribution of approximately 0.6% of the loan balance. This would mean that on a $500,000 mortgage, you could expect a cash contribution of $3,000, taking the effective interest on a 2.49% rate to an amount of $9,450. This means that taking the option of a one-year fixed term of 2.49% with a cash contribution works out to be better off by $500.

This difference in the effective interest is going to be what holds the main banks back from dropping their rates to match the 1.99% special. We're still expecting a possible drop by early 2021, but will we see 1.99% across all banks?

Stuff.co.nz wrote an article recently around interest rates getting down to 1.5%. It is important to note that their prediction is for this to happen around mid-2021. We agree that rates will likely be sitting somewhere between 1.5% - 2% by mid-2021 and possibly staying there for the next 12-24 months.

We are sticking with our view on weighing up the differences between each offer and whether a lower rate actually does mean paying less interest overall or not. If your loan is coming up for renewal soon, we would suggest waiting and acting a week out from the review date and working out which one-year fixed term is the best value for money at that time.

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