Home loan tip: time to fix rates

By Susan Edmunds

Senior economist Mark Smith said borrowers should spread their loans over a range of terms. Photo / Thinkstock
Senior economist Mark Smith said borrowers should spread their loans over a range of terms. Photo / Thinkstock

Short-term interest rates are now noticeably cheaper than floating in some cases, so bank economists suggest it is time to fix at least part of your home loan.

ANZ chief economist Cameron Bagrie said buyers were unlikely to lose out if they locked in cheap rates now.

"If you fix for 18 months at 5.49 per cent, you will save 0.25 per cent compared to the floating rate," Bagrie said. "Ignoring discounting, the only way you'll be better off floating is if the floating rate comes down and averages below 5.49 per cent over the next 18 months."

Senior economist Mark Smith said borrowers should spread their loans over a range of terms. "There's definitely flexibility in floating."

But he cautioned against fixing for a longer term. "If you fixed today for four years at 6.2 per cent, you'd have to see the three-year rate rise to 6.43 per cent in one year to be better off than fixing for one year at 5.5 per cent."

Smith said such a rise had happened in the past but he didn't think it likely now.

It was still worth shopping around for a good interest rate, he said. Borrowers were still getting significant discounts off advertised mortgage rates.

Westpac's chief economist Dominick Stephens said fixing mortgage rates while short-term interest rates were low was a good way to cut the lifetime interest cost.

Stephens said one- to three-year terms were particularly attractive. "You can knock down your principal much faster on a fixed rate."

BNZ chief economist Tony Alexander said floating rates of about 5.75 per cent were unlikely to drop below the one-year fixed rate of 5.25 within the next 12 months.

"[Someone who fixes] is only going to be worse off if floating rates absolutely plummet by something like 1 per cent."

But he said it was very hard to predict what interest rates would do. "I think if you're floating for the next couple of years you'll get some good, low rates. But keep an eye out for low three, four or even five-year rates. At some point the rate will go back up."

Kiwibank spokesman Bruce Thompson said each individual had different circumstances.

"Are they seeking certainty, as in protection against rate fluctuations and knowing exactly how much they are required to pay to service their debt? Are they looking [to] accelerate their payments? Is their view that rates will rise, fall or stay the same? In which case the lowest available is probably the best. There is no single answer."

Floating mortgages made up $104 billion - 60 per cent - of the mortgage market last month, compared with their peak of $109 billion - 63 per cent - in April. But most are fixing for short terms.

Smith said 21 per cent of lending was fixed for less than a year, 14 per cent for one to two and less than 5 per cent was fixed for longer than two years.

Loan's detail is a devil to deal with

Julie Spillett is fuming after being hit with a $5000 bill when her bank asked her to repay a fixed loan early.

"I had a mortgage on a house in Invercargill and also a house in Howick, which was used as security," Spillett says.

When the Howick property was sold, ASB required her to pay back $76,000 of the Invercargill property's mortgage because the house that was being held as security had sold.

"ASB charged us $5402 early repayment but they had asked us to do it. We were happy to pay some back because a house had been sold but as we did have a four-year mortgage, surely we shouldn't have had to pay a lump sum back? Why should we have been penalised for early repayment?"

Solicitor Thomas Biss says the bank is within its rights.

"It does seem unfair, and I would feel inclined to argue that. When you sell a house you need to release the security. They entered into a term loan which they repaid early. The terms of the break fees will have been in the loan. "

Shaun Drylie, general manager retail at ASB, says it is common to use equity on one property to buy another. If one is sold, the bank has to adjust lending accordingly.

- Herald on Sunday

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