Fix or float ... it's a decision that borrowers will have to make as interest rates rise

Interest rates are likely to rise - so what should you do with your home loan?

Seventy-five per cent of Kiwi mortgages are floating, or fixed for less than a year.

That means when the official cash rate starts to increase, probably next month, it will hit people in the pocket quickly.

BNZ chief economist Tony Alexander says rates the banks charge could increase by at least two percentage points over the next two years.


That means someone with a floating $400,000 mortgage at 5.8 per cent, now paying $1300 a fortnight, could expect to be paying an extra $220 a fortnight in two years if they stick with the floating rate, which is expected to be nearly 8 per cent then.

Broker David Windler is dealing with about half a dozen clients a week who want to fix their mortgages to buffer against rising rates.

Two or three-year rates were most popular.

"It's a good move for people who want some surety."

That same $400,000 mortgage fixed now for three years would cost $1364 a fortnight on a rate of 6.4 per cent, just over $30 a week more than at a floating rate of 5.8 per cent, but more than $75 a week less than the floating rate by the end of next year, if it reaches the 8 per cent forecast.

Alexander said he would consider a three-year rate if he were fixing a mortgage at the moment.

Three-year rates are between 6.3 per cent and 7.1 per cent.

"Five years is where I'd really like to go, but at 7.2 per cent it's quite a jump from floating - it's too big a leap. If someone offered a five-year rate of 6.5 per cent, I'd be in boots and all."

He said longer periods were a better move because interest rates were likely to stay high for some time because of the effect of the Canterbury rebuild and the strength of the New Zealand economy.

He said it was hard to imagine the Reserve Bank easing the cash rate until the rebuild momentum waned. And that is not expected to peak until 2017.

Borrowers would need protection through 2016, 2017 and 2018, he said. "The outlook is for strong growth for a number of years."

He said shorter terms, even out to 24 months, did not offer enough protection.

But is $30 a week a price worth paying for certainty, when borrowers can save money now by fixing for a shorter term?

Gareth Kiernan, of Infometrics, said one year-rates still offered the best deal.

One-year terms are cheaper than floating, at between 5.39 per cent and 5.99 per cent.

That $400,000 could be fixed for a year at a rate of about 5.5 per cent, making the payments $1,269 a fortnight, about $50 a week less than the payments on a three-year term.

Rates would have to rise a lot to make that a bad idea, he said.

He said if someone took a one-year rate of about 5.5 per cent now, the two-year rate would have to rise to 7.15 per cent in a year to make a three-year rate more worthwhile.

That was a substantial increase and was unlikely.

Aucklander Gerrie Cashmore has decided to fix the mortgage on her rental properties to give security over the next few years.

She expected floating rates in particular would increase. Long-term rates were still good value and gave certainty.

"I think there will be a couple more fixed rate increases soon," she said.

She has opted for a variety of terms including one, two and three years to hedge her bets and spread out her exposure to rising interest rates.

A $400,000 mortgage with $200,000 fixed for three years, $100,000 for two years and $100,000 for one year would cost about $1329 a fortnight, roughly the same as the floating rate.