Borrowers advised to snatch long-term fixed mortgage rates while the cost is low

Borrowers advised to snatch long-term fixed mortgage rates while the cost is low

ASB and BNZ's economists are advising borrowers to lock in longer term fixed mortgage rates, which are lower than floating rates.

BNZ says five-year mortgage rates, which fell around 50 basis points over the past month, look attractive.

“There is now virtually no difference between five-year fixed and floating rates," BNZ says.

ASB points out last year’s dip below 7% has taken the five-year fixed rate significantly lower than the average level over the past 10 years (7.7%).

It says the rate offers certainty for a much longer period of time than the shorter-term fixed rates, and is only 50 basis points above the one-year rate.

“Accordingly, the five-year term offers a long-term hedge in case future interest rates rise to substantially higher levels than we envisage.”

John Bolton, managing director at Squirrel Mortgages, notes five-year carded, or advertised, fixed rates at 5.95% are "an exceptional rate for clients needing a degree of certainty, or investors wanting to diversify their interest rate risk.”

Bolton points out the interest rate curve is very flat, with similar rates from one year to five years.

“It can’t really get any flatter without an OCR decrease, so rates are about as low as they will go," says Bolton.

He also says there's enough good news domestically to make the chances of the Reserve Bank lowering the OCR negligible. Bolton suggests those intending to fix rates do so quickly as longer-term rates could easily kick back up again.

Nonetheless he says when interest rates do rise, it wont be by much.

"We believe that lower than normal rates are here to stay and we’ve been consistently saying that for some time now," says Bolton.

Meanwhile BNZ predicts five-year rates will rise from here.

BNZ says, “We see five-year rates pushing higher, after the US Federal Reserve begins hiking around mid-year, and the market becomes less convinced the RBNZ will imminently cut rates.”

ASB says longer-term rates will most likely change over the year ahead, even if the RBNZ holds the OCR steady at 3.5%.

“The US Federal Reserve is expected to lift interest rates over the next year. But the current bout of dis-inflationary forces stemming in part from tumbling oil prices is clouding the outlook for US interest rates."

The weak European economy and related low inflation have triggered more monetary policy stimulus from the European Central Bank. These global influences look set to keep term rates low in the immediate future, while global growth concerns are high.

“However, we expect the global backdrop to improve over the course of the year. And that improvement should in turn eventually lead to higher offshore interest rates, and higher NZ term mortgage rates," ASB says.

Nonetheless, all three lenders say fixed-term shorter-term rates are the cheapest option at the moment.

Bolton says two and three year fixed rates, which range from around 5.45% to 5.60% and 5.65% to 5.75% respectively, are providing the best value for money.

ASB says its six-month rate is nearly 1% below the floating rate.

“Borrowers can create some certainty, and obtain a lower rate than floating by fixing for short terms,” ASB says.

“In fact, almost all of the carded rates at the main banks are lower than floating rates at the time of writing, effectively meaning borrowers can create interest rate certainty and at the same time save on interest rate costs."

“Right now the RBNZ’s signal to pause, and the low global rates, are helping keep the six-month and one-year rates and some targeted ‘specials’ on offer under 6%, significantly below the floating rates.”

BNZ expects shorter-term fixed rates to keep falling, before rebounding later this year.

BNZ points out two-year wholesale rates have fallen a further 25 basis points over the past month and sit around 3.60%.

As for floating rates, Bolton says there’s no point staying in a floating rate, as most borrowers will be paying 6.00% to 6.25%.

ASB says floating mortgage rates should remain stable in the foreseeable future, if its view that the RBNZ will keep the OCR on hold, is correct.

“Despite the four OCR increases, the floating rate remains around 75 basis points below its 10-year average of 7.5%.

“If the RBNZ were to actually cut the OCR, then borrowers would benefit soon afterwards.”

Yet ASB still expects the cost of floating rates to be higher in coming years than the cost of locking in fixed term rates now.

It suggests splitting a mortgage into different terms, or a mix of fixed and floating mortgages, can be a good strategy for keeping a bit of flexibility while locking in some interest rate certainty.

See all banks' carded, or advertised, home loan rates here.

This is how mortgage rates from the banks will probably compare as at 9:00 am Wednesday, February 4, 2015:

below 80% LVR 1 yr 18 mths 2 yrs 3 yrs 4 yrs 5 yrs
5.45% 5.70% 5.55% 5.99% 6.49% 6.59%
ASB 5.59% 5.70% 5.55% 5.59% 5.99% 5.99%
5.69% 6.09% 5.65% 5.69% 6.49% 6.59%
Kiwibank 5.69%   5.55% 5.89% 6.39% 5.89%
Westpac 6.09% 6.30% 5.79% 5.89% 6.79% 5.99%
Co-op Bank 5.59% 5.49% 5.59% 5.74% 5.99% 6.25%
HSBC 5.45%   5.65% 5.79% 6.49% 6.49%
SBS Bank 5.59% 5.74% 5.49% 5.49%   5.94%
5.70% 5.90% 5.50% 5.95% 6.40% 6.50%


Mortgage choices involve making a significant financial decision so it often pays to get professional advice. An AMP mortgage broker can be contacted by following this link »

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Comment Filter

Highlight new comments in the last hr(s).

Sounds like a good Tui ad to me! Yeah right!

Best to stay on 6 month or 1 year fixed rate, and keep an eye out for the declining and lower rates in the deflationary future.  
Think of all those regretful borrowers who bought the story line and are now locked on 6 to 7 % for 2 or 3 years.   

Personal story: I believed and still do that interest rates in NZ are going way down from where we are and have been for around the last 2 years.
I come to this conclusion from having picked up bits of info and a world view from many sources including ZeroHedge, Gerald Celente, John Williams etc etc, our own financial media and mainly my own common sense.
With interest rates around the world at 1% or less and now in some countries a negative interest rate, NZ sticks out like a sore thumb with our OCR at 3% and bank rates at 4-7% Why isn't every investor bringing their money here to invest at such great rates?!
Back to my story, I'm very very risk adverse and somewhere in the back of my mind something suggested that despite all of the above NZ was going to see it's interest rates spike up to over 8% in the medium to long term (2 - 5 years) so I fixed at a discounted 5 year rate of 5.74%.
Now I am still totally happy with where I'm at but colleagues point out similar to the above comment by MB, After 2 years now of rates really going nowhere, from the time I fixed I could have taken the 1 year special at 4.99%, and then another 1 year at arounf 5.15%. Now I can get 5.55% for 2 years or lower from Kiwibank, possibly conning cash contributions by playing banks of against each other all the way.
When NZ can borrow funds at such low rates and with deflation starting to show, the banks including the reserve bank will not be able to use and justify our OCR as measure of our interest rate environment and we will see much lower interest rates than what we have now.
Of course there could be some huge global event that changes everything and rates shoot up up up like the little thought in the back of my mind somewhere.
Everything carries risk and I always get it wrong somehow so just do what YOU think is right and see how the game plays out.

I read all the same stuff, Zero hedge,  Jim Rickards, Harry Dent, Steve Keen etc.  It seems that the fear index, at least on youtube, from a lot of commentators has reached fever pitch.  Moreover the fundamentals actually seem pretty bad right now.  The Baltic Dry index is at all time lows, Copper is crashing, oil price crashing.  It seems that the engine driving the global economy breaking down.
And on top of all that there's weird stuff like this from Jim Rickards.  I mean what's with that?  do you take it at face value as a sincere warning? or is it some form of government funded behavioral modification?  hard to know what to think, but i did think highly of his books.
It seems our interest rates could go down a long way, but then so could asset prices if central banks ever stepped out of the way.  In NZ our private debt to GDP ratio I believe is about 150%.  That high debt loading leads to financial instability according to Minsky's theory.  Houses in Auckland are already way overpriced according to incomes, and rental yields.
That being said, last week my partner and I made an offer of over 770K for a crappy little cross leased thinie with a bodycorp.  It was a bit of a stretch for us DINKS but we missed out on that one, didn't offer enough.

congrats seems your link crashed youtube....
"500 Internal Server Error
Sorry, something went wrong.

A team of highly trained monkeys has been dispatched to deal with this situation.
If you see them, show them this information:

Obviously the American Govn doesnt want us to see it over here in NZ.

ha ha, Just because you're paranoid, it doesn't mean they're not after you!  I for got to mention Chris Maternson.  I know this this would appeal to you, he specialises in energy and resource depletion.

Looks like a good link I'll watch him later. 
While I agree with his outlook (a long depression) what I dont agre with is what he sees as the cause.  Typical right winger, its never the free market's fault its always Govn/fed/someone else who did us in.

copper is crashing?
oil is crashing?

So in other words we have an over supply problem, and the world is going to end because we're being too productive?  What?

I don't think it's as simple as that.  Deflation destroys the banking system.  If the nominal value of debt goes up, then debtors default.  Deflation also increases the purchasing power of wages in a way that's not taxable by governments.  The natural state of the world right now appears to be highly deflationary.   Governments and central banks simply will not allow that to happen. Financial assets derived from real estate etc. (like Auckland houses) won't be allowed to deflate.   Therefore interest rates including here in NZ will go lower for longer, more QE in Europe,  Fed will be patient forever.  Labor force participation will drop.  Productivity and GDP will decline.   Wealth transfer from savers to asset holders will continue.  Dangerous times.

Deflation destroys capital, not the banking system.  Banks are the middle men they make a % on the transactions it is only when they are allowed to gamble with others money that they are in risk of failure I suspect.   If I recall correctly after the Great Depression the US put laws in place to stop that happening again. However Bush? recinded them.
" Wealth transfer from savers to asset holders will continue.  Dangerous times.", 
Not "savers" but the "saved", there is a big difference.   If you look at the whinning the "saved" are worried about the risk of loss and expect to be bailed out by tax payers/future generations.
So I do not follow you here, more like wealth transfer from tax payers and future generations, or moral hazard exists.

Default is an instant transfer of wealth from the creditor to the debtor, and on a large scale that destroys the banking system.  There's no moral hazard in NZ for "the saved" anymore, that disappeared with OBR and covered bonds.  The saved are like lambs being led to the slaughter because 10% inflation per year in Auckland house prices is hyperinflation.  Asset purchasers on the other hand have moral hazard because they buy pretty much knowing that governments and central banks have 'got their backs' at the expense of savers, and tax payers.   I guess Glass-Stegall and  "too big to fail" are also part of the problem.  There's been little reform of the bankign system since 2007, at least not much that favors tax payers, wage earners, and savers.

Yes you could have watched the rates like a hawk and chopped and changed your mortgage every 12-24 months, and with hindsight you may have saved a little.  Or you could fix for 5 years and get on with life.
 Besides, without hindsight how were you to know the BoJ and ECB were about to start money printing, and the oil price was about to crash?  Rates could easily have gone the other way

Not so sure.
What I am very much unsure of is the future scenario.
While I expect there to be a trend down in the OCR, say even 1% I really doubt we'll see retail rates at say 3%. The banks have to borrow and while the RB can drop the rates because of problems investors will want more because of problems, ie they will run to the safety of the US dollar and would ned encouragement to stay. 
What if no one wants to lend to us? would that cause a spike in wholesale rates forcing the banks to put up their rates?
As an example gold is used as a store of wealth to get you through an event, so fixing for long enough achieves a similar sort of thing. Though I believe the bank has get out clauses on that if it actions them?  So it doesnt have to honour say a 4.5% for 5 years.
So can retail rates get to 4%? Grant and Stephen know far more about the detail of finance and can maybe answer that, but they seem to be hinting to me, no.
So if you expect some severe turmoil fixing to get through it may max sense, certianly I agree on 6 or 12months, unless someone can say why not?

Funny story:
Had my banker ring me doing a "follow up" on a question I had about what they could do on a 3 year term for me and what the break fees would be if I pulled out now. Thing is that I didnt ask that question, I havent even talked to the bank in the last 4 months...."Oh but the spelling was the same blah blah blah, well even if it wasnt you I had a look anyway, we can do 5.55 for 3 years, no break fees" - "nice try" I said.
I locked in 5.74 for 1 year - for our first home, back in July. Note, we had to sign a sort of loyalty contract for 2 years with the bank in order to get the $3000 incentive. Seems the smart ones were fixing for very short terms the playing the banks off  with brokers and jumping ship from incentive to incentive.
So we technially have to stay with the bank one more year after this term finishes, but I see that as a better lever to obtain a sharper 2/3/5 year rate depending on what the crystal ball looks like at the end of July, otherwise I'll stick with 1 more year, then contact a broker when that terms up.

My bank used to call me with "follow ups" like that (to fix at or just under the current rate) .... every time it was just before they dropped the rate

I've always been a fixer, I like the certainty of replayments I get from fixing. I bought into the Hype almost exatcly a year ago and fixed for 3 years at %5.85.

Am I dissapointed? No, and here's why.

Assuming a mortgaged amount for $300,000 and a term of 30 years:
    at %5.85 the monthly repayments would be $1770

    at %5.65 (roughly taking the median on the values in the table above) $1735

$8 a week extra, which I see effectively as insurance against the nay-say, the 'hype' as you put it, to ride through the uncertainty around the results of elections, RBNZ threatening to put further pressure to cool the housing market.

My mortgage is much less than that, so the difference is even smaller. The lower the rates go, the less the difference is in terms of repayments between one rate and the next, basic math.

Small price to pay for the certainty in my books, as well as the fact that you can't finaicially or psychologically afford the extra $8 a week then floating is possilby an even worse option than fixing.

I heard Westpac have borrowed $750M in Euros @0.6% and lending it at 6% is a profit of 1000% probably more if some was able to be leveraged so this tranch alone could be lent at 3.5% for a still outrageous margin of 300% albeit this would severley constrain their ability to increase Directors Salaries and Investment Gamblers Bonuses  to single digit millions whilst being unable to increase staff wages. perhaps its time that Madame Guillotine made a overdue appearance.

MortgAge rates cut today in Australia
4.6% 5 year fixed.   5.6%. Floating.