- Homeowners choosing floating or short-term rates may lose money, warns mortgage chief Andrew Chambers.
- Chambers advises considering two or three-year fixed rates, which are currently around 4.99%.
- CoreLogic’s Kelvin Davidson notes “rate wars” could shift borrowers back to longer-term fixed rates soon.
Homeowners will be losing money if they choose floating or short-term rates, a leading mortgage broker has warned.
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Andrew Chambers, CEO of Tella home loans, was responding to new figures which showed 90% of borrowers refixing in January had gone short instead of taking the sub-5% long-term deals the big banks were offering.
That’s a scary number of people opting for short-term solutions to mortgage uncertainty, Chambers told OneRoof.
“At the moment, two months of sitting on a floating rate is probably a similar cost to fixing for one year. The shorter the rate, the higher the cost at the moment.”
He said homeowners who were choosing shorter-term rates in the hope rates would come down further were "banking on stuff" they had no control over.
“We’ve got a fairly volatile global picture out there. The banks may not come out with lower rates. They might be looking at the global forecasts and going, ‘Actually, we need to preserve our margins. We may not be able to get wholesale funding from places like the US at lower prices in the future’.
“Our dollar is also going up against the US. It happens whenever there’s uncertainty – but that has an inflationary pressure on New Zealand and is more likely to see rates going up, not down.”
Chambers said the two and three-year rates were “actually very good at the moment”.
“They’re into the fours now at best, and for a lot of people, we don’t know whether we’re going to get an increase in income over the next two years. There’s some uncertainty around that, so good advice would be to think about potentially locking in those costs.”
The best floating rate at the time of writing was 6.89%, and the best six-month rate from a main bank was 5.79%, while two and three-year rates were around 4.99%.
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Chambers said that equated to about $8000 a year more on a floating rate compared to a two-year rate, or $3200 more a year between a six-month rate and a two-year rate. “It’s not pocket money, and you’ve got some certainty when you’re locked in for longer.”
People should remember their loan was spread over 20 years and that attempting to game the market was futile.
“I always say that if you put it on a one-year fixed rate for the entire term of the loan, you probably come out as good as those trying to play the market.”
The market was heading into a “new normal”, he said. Banks had dropped their servicing rates for assessing home loans from 9% at the peak of the rate cycle back to about 7.3%, and this means people are able to borrow more against their income.
Tella chief executive Andrew Chambers: “We’ve got a fairly volatile global picture out there." Photo / Supplied
“That’s taking the pressure off a bit when it comes to what first-home buyers can afford to buy and what people can do in terms of buying the next family home.”
CoreLogic’s chief economist, Kelvin Davidson, said the recent emergence of “rate wars” was an area to watch in terms of borrowing behaviour but the fixation with short fixes might be about to come to an end.
“Around 71% of New Zealand’s existing mortgages by value are currently fixed but due to reprice onto a new mortgage rate soon, and another 12% is floating,” he told OneRoof.
“Over the past two to three years, these repricing events have generally meant a higher mortgage rate for borrowers.
“However, that situation has now turned around again and with the rate wars recently emerging among lenders offering lower two to three-year fixed rates, we could start to see a shift back towards them pretty shortly.”
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* Tella has a home loan partnership with OneRoof.co.nz
