Five-year fixed mortgages make a comeback

Personal Finance / analysis

Latest Reserve Bank figures show that while small in total, the amount of mortgage money taken out for five-year fixed terms nearly doubled in August

5th Oct 23, 3:55pm by David Hargreaves

Source: 123rf.com

Did somebody say 'higher for longer'?

According to the latest monthly figures in the Reserve Bank's recently introduced data set on new lending fully secured by residential mortgages, August saw some rekindled enthusiasm for the seemingly long-forgotten five-year fixed mortgage terms.

This particular data series, only introduced several months ago, covers new lending or facilities loaded in the reporting month. This is different to other RBNZ series on mortgage lending, which report new mortgages on the basis of when they have been committed to, rather than when they've actually been taken up.

Since the beginning of this series it has been quite clear that those taking out new mortgages are closely following the 'cheapest' deal they can get in terms of rates. A few months back, for example, as some banks were offering relatively low three-year rates then so we saw a spike in the take up of those. But this is now reversing as the rates for three years have relatively got higher again.

The one and two year fixed mortgages have continued to be generally the most popular, although 18-month mortgages have made something of a comeback in the latest month as well.

But it is interesting to note that as the talk has gradually begun that current levels of interest rates we are now seeing may be with us for some time, then so some folk may be looking longer.

And if we look at the RBNZ's separate data series giving the average rates of interest across all the banks, this shows from earlier this year the gap between what is being charged for say, the one-year fixed rate and the five-year rate has widened, IE, the one year rate is now considerably higher comparatively than the five.

In April for example, the one year term average rate was 6.67%, compared with a five-year average rate of 6.32%. As of August the one-year average stood at 7.1% versus a five-year average of 6.41%. So, quite a gap forming.

In terms of the overall mortgage data for August 2023 there was $5.699 billion advanced, up from $5.157 billion in July.

Looking at the owner-occupiers, there was $4.347 billion taken out in August, up from $3.916 billion in July. In August there was $3.587 billion taken out at fixed terms, up from $3.218 billion in July.

According to the RBNZ's summary, among the owner-occupiers, the most popular interest rate term was one-year fixed, with this term accounting for 27.8% of all new lending, up from 27.0% in July. However, the total value of lending on six-month, 18-month and five-year terms all saw the highest percentage increase from July, increasing 19.5%, 21.0% and 86.2% respectively. Meanwhile, lending on three-year terms continued to fall, recording a 12.6% fall from July.

Back on those five-year rates, then. There was $108 million taken up for five-year terms in August by owner occupiers. So, it's not much. But it is up from just $58 million the month before. And yes, the overall total rose somewhat between July and August, but in percentage terms among the amount of fixed mortgages, the percentage on five-year terms jumped to 2.8% in August from just 1.5% in July.

And we have to go back to June 2022 to find the last time more than $100 million worth of owner-occupier mortgages were fixed for five years.

The five-year term did indeed gather some popularity in 2021 just before interest rates started to climb rapidly, but it soon lost favour again to the shorter terms, with most people believing - it seems - that this spike in interest rates would be relatively short-lived. Perhaps some are now changing their minds.

It will be worth watching these figures in coming months to see if homeowners start to decide to 'go longer' in the belief that rates will be staying higher for longer.

New residential investor mortgage lending rose to $1.3 billion in August, up 10.0% from $1.2 billion in July. One-year fixed terms were the most popular, making up 31.5% of new lending. Lending to residential investors showed similar trends as owner occupiers. Lending on six-month, 18-month and five-year terms had the highest percentage increases, while lending on three-year terms continued to decline.

Overall, the share of total new residential lending on fixed interest rate terms continued to rise to 81.9%, up from 81.7% in July. The share on floating terms fell to 18.1%. This is the lowest share on record.

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34 Comments

by TronMVP | 5th Oct 23, 4:10pm 1696475412

I got a 5 year rate for 5.99% just a month ago. I thought it could be too good to be true at the time, but now most 5 year rates are up to 6.5%. Normally I wouldn't go for a 5 year rate, as I have been stung before when interest rates came down, but I don't think anyone can complain these days with a rate at under 6%.

by GetFeeling | 6th Oct 23, 11:42am 1696545767

Did you engage the services of the "Advanced Mortgage Calculator" on this site before making that decision?

5 years is a long time. As a basis for that statement, peaks in the OCR (or Feds fund rate or any central banking rates) seldom last for more than a year. Fixing 'long' when we're already 6 months into what is extremely likely to be the OCR peak may be something you live to regret - again. Old saying: "Fix long when rates are low, and fix short when rates are high". ("Low" and "high" are relative to recent averages and not the daft averages some are using from the last 30 years!)

Never, ever listen to bank economists when they're talking about where interest rates are going to go. Listen only to the non-bank economists as they're much more likely to be impartial.

by HughJorgan | 5th Oct 23, 4:31pm 1696476704

5 years is a long time away. You won’t know if it was the right call until about year 3.

Many people will stay short and cross their fingers and toes.

by kpnuts | 5th Oct 23, 4:40pm 1696477211

i got lucky / smart and grabbed a 2.99 fix a couple fo years ago just before rates went up --- mainly because i could not see any downside to rates below the 2.3 -2.5 one year rates -- but also because the five years at that rate meant i could pay off my remaining debt in that time -- and had total security for the rest of the mortgage ( 54 yrs old BTW)

If you can afford it -- are comfortable with it -- its totally the right call -- even if ultimately there proves a cheaper option-- which may involve having to fix correctly three or four times in that time period -- unlikely you get all the calls right -

I remember a lot of chat on here around the time i fixed and certainly just after about inflation being transitory -- which i could not comprehend -- as there as little sign that would be the case - things like extreme weather events are not one offs -- instead there ill be more of these just effecting different areas and products -- oil is finite power is not going down -- council rates/ water other utilities - insurance with the increased weather events etc -- be a long hard road to get it back to 4% never mind 1-3% so i would be pretty happy with your fix mate !

by jeremyr | 5th Oct 23, 5:07pm 1696478867

Same. I'm at 3.5% or something till the end of 2026. My payments are 80% principal, so looking to have it paid off when this low rate ends. I can't believe people laughed at others taking 5 years at 3% and insisted rates would go to zero and we would be missing out on this interest-free debt nirvana.

by General Comment | 6th Oct 23, 7:07am 1696529260

I'm on 3.19% until May 2026, by which time I will have paid off about 65% of the mortgage I took out in 2019.

by Albert2020 | 6th Oct 23, 8:49am 1696535360

How can you have paid off 65% of your mortgage if you are on a fixed rate? Most banks won’t let you pay any more than 20% above minimum. I assume you paid off a massive chunk when refixing?

by Chaosinflesh | 6th Oct 23, 8:56am 1696535819

65% over 7 years.. I'm sure they'll answer, but not everyone takes a 30 year term.

by General Comment | 6th Oct 23, 9:21am 1696537291

It's not a 30 year term, and I will be making a large payment when the fixed rate expires. Apologies for the confusion.

by jeremyr | 6th Oct 23, 9:44am 1696538648

You jack up the repayments. and the bank doesn't mind. Then create an offset account (preferably interest-bearing) and put anything that you cannot put against the mortgage into that. That way when components of the mortgage come due they are offset, and whatever balance remains becomes interest-free. I'm paying 4-5 times the minimum payment on some blocks of my mortgage. The whole thing will be paid off in about 6-7 years (instead of 25).

by HughJorgan | 6th Oct 23, 8:41pm 1696578083

You shouldn’t be paying off more than the minimum on your loan. Put any excess in to term deposits and arbitrage the rate difference. Pay it all back as a bullet payment in May 2026.

by GetFeeling | 7th Oct 23, 2:41pm 1696642911

That sounds like the dumbest advice ever.

But I will acknowledge that with the assistance of a very accurate crystal ball and an extremely limited set of future scenarios it may be right. In all others, and without that accurate crystal ball, I'd call that the worst advice ever.

Care to explain your reasoning?

by Nzdan | 6th Oct 23, 9:16am 1696537006

Was a little gutted when we traded up in December 2021. As we were in the process of looking/putting in offer etc the rates shot up massively so we only managed to lock in a 4.95% 5 year fix.

Rates were 3.5% in June, and by December 5%.

by Pa1nter | 5th Oct 23, 4:33pm 1696476786

Still amusing how many people didn't lock in "emergency rates" for 5 years thinking they'd maybe pick up finance under 2% in 2022 onwards.

by CN - new | 5th Oct 23, 6:54pm 1696485250

For some reason most borrowers in NZ choose to fix their interest rates for shorter periods.

Five year fixed rates were on offer and most chose 1 - 2 year mortgage interest rates. Many may not have chosen 30 years fixed rate even if the banks offered it. Yet when mortgage interest rates were rising rapidly, there were complaints about why NZ banks didn't offer 30 year fixed rates (such as available in the US). Also note that this was only when mortgage interest rates were rising - there were no complaints about the lack of 30 year fixed rates offered by banks when mortgage interest rates were falling.

by GetFeeling | 6th Oct 23, 11:51am 1696546281

re ... "For some reason most borrowers in NZ choose to fix their interest rates for shorter periods."

The reason could be that for the last 20+ year (excepting the occasional spike) interest rates have been falling. Thus fixing short to pick up a lower rate in a short period of time has paid off for many.

If you believe the "higher for longer" hype (I don't, can't see any structural change that would justify it, and it seems to be coming from primarily bank economists) then times may be a'changing.

by jeremyr | 6th Oct 23, 12:13pm 1696547632

Bank economists keep saying we have already had a peak and rates are going down. Thats unlikely. If you look at the interest forecast here, https://tradingeconomics.com/new-zealand/interest-rate, they are forecasting OCR/Swaps at an 8% peak. Its' pretty typical for bank economists to tell you that the peak is reached because they want to sucker you into a short-term rate so that you are screwed at the end of the short-term rate and you then settle for a long-term higher rate right before rates start to decrease. Currency traders I have talked to overseas during my travels have talked to me about the same thing, they don't understand why people are saying rates are going down, and are expecting a spike in rates at the end of this year or early next year.

by ChrisOfNoFame | 6th Oct 23, 3:37pm 1696559870

re ... "Bank economists keep saying we have already had a peak and rates are going down."

NZ bank economists? Which ones?

ANZ: rates will need to go up

Kiwibank: an outlier - OCR cuts mid-24

All the others: "higher for longer" with caveats about either up or down ... But mostly up a notch.

Sorry, my post was about the bank economists in NZ (and the media's slavish devotion to publishing everything they say without acknowledging any potential bias or conflict or interest).

by WellingtonInvestor | 6th Oct 23, 1:52am 1696510351

In the US many fixed at the low rates for 30 years for that certainty. So it makes me wonder why NZers didn't fix for as long as they could. Some banks used to offer 7 year terms, but banks got rid of that a few years ago because they weren't popular with rates dropping. But things change when rates rise.

by Chaosinflesh | 6th Oct 23, 8:55am 1696535709

I'm wondering how many new purchases picked the shorter rates because they couldn't comfortably afford the higher rates at the insane prices they were paying (comfort vs stress test)?

by Zwifter | 6th Oct 23, 9:24am 1696537482

Pretty funny on here how suddenly everyone is a financial guru. Hardly anyone went long on the 3 to 5 years. Tried to tell my partner to go 5 but she went 3. The majority of people saw low or even zero rates the RBNZ kept talking about, even the lies of negative rates where the bank somehow starts paying you to take a mortgage.

by jeremyr | 6th Oct 23, 9:39am 1696538349

It was pretty obvious what was going to happen. The quality of economists and other so-called financial gurus we have in NZ is pretty poor. They have been consistently wrong throughout the entire last 3-5 years with their calls on interest rates, the property market, and inflation. You name it, it is pretty poor. Fixing long at the bottom was an absolute no-brainer. A once-in-a-lifetime opportunity.

by Pa1nter | 6th Oct 23, 10:30am 1696541452

Quite a few people here make me feel dumb, with all the talk of inverted yield curves and what not, yet locking in low for 5 years seemed a bit of a no brainer. At the very least you have some financial certainty in what promised to be a very uncertain following few years.

by GetFeeling | 6th Oct 23, 12:07pm 1696547225

re ... "Pretty funny on here how suddenly everyone is a financial guru. Hardly anyone went long on the 3 to 5 years."

Once again one needs to separate the 'advice' given by bank economists from that given by non-bank economists.

If you go back to when long carded rates (5-years) were down to 2.99% the bank economists were the ones saying "rates have further to fall". This nonsense wasn't helped by the RBNZ telling the banks to get ready for a negative OCR. (Yet another black mark against the RBNZ.)

Non-bank economists were saying no such thing. IMNSHO the banks were working a long con. And when they realised too many people were still looking for the long carded rates they rapidly increased the spread between 1-year and five-year damn quick - once again forcing people short.

(And btw - when many people applied for the long carded rates, many were denied for spurious reasons but offered shorter ones. I hope ComCom uncover some of the emails flying around inside senior banking ranks where this 'con' was discussed.)

by Nzdan | 6th Oct 23, 3:15pm 1696558515

B-b-b-b-but personal responsibility. People should be prudent with their finances. It was so obvious that interest rates were going to rise......

by ChrisOfNoFame | 6th Oct 23, 3:48pm 1696560506

It might have been obvious to you and I ... But remember very few kiwis take such an interest.

Even more so when media is constantly regurging every word bank economists utter as if it is economic gospel while never acknowledging bank economists are far from independent and/or impartial. For example, how many people know what bonuses the bank economists get if their bank is successful? I'd be fascinated to know exactly how their remuneration is structured. (I know how for some European banks but not NZ ones.)

And economics is not taught in kiwi schools, or as part of most uni degrees.

by WildOscar | 5th Oct 23, 5:15pm 1696479334

Still surprises me how many people opt to pick a winner.

It's pretty each to choose every term from 1 to 5 years and mitigate the risk.

by CN - new | 5th Oct 23, 6:56pm 1696485389

Based on borrower expectations.

One property investment calculation done in 2021, was working on the assumption that mortgage interest rates would go lower than 2.5%. They were looking at how much they would save if interest rates went to 2.0% p.a.

by estateagent | 5th Oct 23, 7:51pm 1696488714

Those who have fixed for 5 years will panic and pay huge break fees in about 18 to 24 months time - seen it all before

by Hummy | 5th Oct 23, 9:56pm 1696496206

And this smart government had the option to borrow money at 1% for 30 years 3 years ago.

by CN - new | 6th Oct 23, 1:45am 1696509932

The Austrian government managed to borrow money at cheap cost for 100 years. Check out those bonds which mature in June 2120

by Sluggy | 6th Oct 23, 7:16am 1696529806

The best rate I could get for my business in March this year was 8.5% fixed for 2 years. I don't know what any mortgage holder is complaining about.

by Zwifter | 6th Oct 23, 9:29am 1696537794

That's back to the 8.6% I was paying for 7 years in the mid 2000's. Problem is my mortgage was 1/4 of what some people have now and it was still paid off in under 15 years. The interest rate is relative to the size of the loan.

by Pa1nter | 6th Oct 23, 10:28am 1696541290

I was paying 14% in the 2000s on a business loan. But it's usually tied to your business model and margins, so it's not the same as a home loan.