Mortgages | fixed or floating? Shared by Auckland law firm Quay Law NZ

Source: NZ Herald – 13 January 2013

Floating mortgage holders could save more than $700 million this year by switching to a two-year fixed rate, statistics show.

A total of 916,142 floating mortgages were recorded nationwide in the most recent Reserve Bank statistics, paying an average of 5.79 per cent a year.

But those who fixed their mortgages for two years had their rates drop to an average of 5.29 per cent. And brokers reported two-year rates as low as 4.9 per cent were common.

First-home buyers could save even more by fixing their loans. The average new loan in Auckland is about $400,000. The difference in interest between a 5.79 per cent floating rate and a 5 per cent two-year fixed rate on a loan that size is $3160 a year.

The total mortgage lending on floating rates is almost $98 billion, down on the almost $106 billion floating this time last year.

Just over $80 billion in mortgage lending is on fixed rates.

Economists say it makes sense to fix when the fixed rates are cheaper than floating and the official cash rate does not look set to rise.

Westpac senior economist Felix Delbruck said fixing was better value. “Staying floating is only better if there are cuts to the OCR. That’s a risk but we think rates are on hold for now.”

ANZ recommends splitting a mortgage into several portions with expiry dates of six months, one year and two years.

An argument against fixing is that floating rates may be higher by the time the fixed period expires. But rates would have to rise substantially for that to happen, something experts peg as unlikely.

ANZ said borrowers would need to expect the two-year rate to be at least 6.23 per cent in one year’s time to make fixing for three years preferable to fixing for one year at a lower rate then refixing for two the next year.

“That’s quite a rise considering we expect the interest rate environment to remain fairly stable.”

Paul Bloxham, of HSBC, predicts a more gradual increase, with floating rates inching up this year and next year to reach 6.9 per cent by December 2015.

Philip Macalister, publisher of Mortgagerates.co.nz, said it was unlikely the official cash rate would be increased.

“The 90-day bank bill forecast graph in the December Monetary Policy Statement shows clearly how, over the past year, forecast increases kept getting pushed down each quarter. A year ago the bank was predicting the 90-day bill rate would be up at 4 per cent by March 2014. That forecast was wound back to 3.3 per cent in March, 3.2 per cent three months later and is now down at 2.8 per cent.”

But ANZ chief economist Cameron Bagrie said decisions were not always about break-even analyses and cashflow.

Some people wanted the certainty of knowing exactly what their interest rates would be for as long as possible. “A lot of people value certainty and that can dominate the cashflow benefits when it comes time to make a decision.”

Mortgage brokers said they had been able to get rates as low as 5.7 per cent for four years and 5.85 per cent for five from most lenders when clients were borrowing more than $500,000.

Squirrel’s John Bolton said he was not a fan of people fixing for a long period unless their debt servicing was tight and they would struggle if rates moved.

“I’m only doing longer term fixed for investors with more than three or four properties who are reliant on the rent for servicing.

“With young buyers maybe looking to start a family I’m using the two- and three-year rates on the basis that mum goes back to work part-time, which is a reality in Auckland.”

Mortgage Supply Co’s David Windler said only three loans were settled last month by his firm with a five-year fixed rate. But he said customers were not settling for anything less than good deals on interest rates.

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