News and Opinion, sponsored by RaboPlus

By Bernard Hickey

Here’s the short version: It’s now clear that the landscape for interest rates in New Zealand (and globally) has now changed for years to come. Variable mortgage rates are now likely to be significantly cheaper than fixed rates for long periods of time, long enough to make it worthwhile to switch to variable rates to consistently get the best deal. Some may choose fixed rates to be sure of their outgoings, but those looking for the cheapest rate for the longest period are probably now best off floating. This is a change to a landscape that has been in place for almost a decade.

Here’s the long version: New Zealand home owners have assumed for years that fixed mortgage rates are usually cheaper than variable rates and that choosing to fix is the default option. The only doubt in the past was for short periods at the margins when interest rates were falling fast or there was some temporary hiccup in the market. Sometimes borrowers would choose to float as rates were falling and then aim to ‘pick the turn’ and jump back onto fixed rates.

But what if something fundamental changed that meant New Zealand’s variable rates were usually cheaper than fixed rates for years on end? I’ve held back for months from even suggesting this given the New Zealand mortgage market’s history for most of the last decade. We’re a nation addicted to fixed rate mortgages, but I think it’s now time to seriously considering floating for the long term to get a better deal.

Reserve Bank Governor Alan Bollard said in the bank’s March Monetary Statement (MPS) on March 11 that he now expected bank funding costs to remain elevated for a long time, partly because of increased competition for funds globally and because of moves by regulators to restrict access to the cheap ‘hot’ money that helped keep longer term fixed rates lower than floating rates in the past.

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By Bernard Hickey

Here’s the short version. Longer term fixed mortgage rates began rising again in early August after a couple of months of stability. This will prompt some to jump from floating to fixed as they consider buying for the first time or buying more rental properties. This is despite the Official Cash Rate remaining on hold until mid 2010 at least.

This has surprised a few people and may prove politically unpopular, but it makes sense when you look at the underlying drivers for interest rates. It reinforces the view that interest rates have stopped falling, particularly floating rates. There appears nothing to lose by jumping from floating to fixed now.

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By Bernard Hickey

Here’s the short version: Mortgage rates have bottomed out. The Reserve Bank of New Zealand (RBNZ) ended six months of record rate cutting on June 11 by leaving the Official Cash Rate on hold at 2.5%. It has called for banks to further reduce their short term mortgage rates, but this call is likely to be ignored, even though the RBNZ has reassured them that the OCR will be on hold until late next year.

Banks are increasing their longer term mortgage rates (3, 4 and 5 years), but are generally holding their floating, 6 month, one year and two year rates. Those wanting the certainty of a longer term mortgage to lock down their costs should fix now because the waves of government borrowing hitting our market and credit markets globally will push up longer term interest rates for years to come.

Those wanting the absolute lowest rate for the immediate future can probably afford to stay fixed at 6 months to 12 months for another 6-12 months because the economy will probably stay in recession until late this year or early next year and the Reserve Bank has ‘promised’ to keep the OCR at or below 2.5% until late 2010.

But the risk is that longer fixed rates will have risen sharply by the time a borrower tries to lock in a longer term rate. If my brother in law was asking, I’d say lock in for a couple of years now because rates are rising. It’s not urgent, but anyone borrowing should know that the long term average mortgage rate in New Zealand is around 8% and rates will revert there at some point from around 6% for 1 to 2 year rates now.

If my brother in law was still sceptical, I would say have it both ways by floating half and fixing half.

Here’s the longer version:

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By Bernard Hickey

Here’s the short version: Fixed mortgage rates are rising, but it’s possible variable mortgage rates could stay below fixed rates until later this year. Those choosing to go fully fixed for a 2 or 3 year term are betting the OCR will rise quickly above 5% by the end of 2010 or early 2011 from 2.5% now. That is possible if the economy recovers as strongly as most economists now expect and given it has averaged 6% since 1999. (Updated January 13)

Those choosing to go completely variable are betting the OCR will stay below 5% until at least late 2010, which is possible if the global economy remains stagnant and New Zealand’s economy recovers fitfully. I’d say to my ‘brother in law’ the safest bet right now is to split the mortgage into half variable and half 2 year fixed to allow early repayment and to reduce the risks of either a sudden move up in the OCR or no move at all.

Here’s the long version below

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