Wrong time to fix mortgage rates

Extremely low interest rates in the United States signal a weak economy. Photo / AP

Homeowners should ignore calls to fix their mortgage rates, some commentators say.

Philip Macalister, editor of Good Returns, said some banks had been "gently encouraging" people to move to a fixed rate but there was no good reason to do so, until there was some certainty of a mortgage rates rise in the near future.

"The key thing that will drive interest rates up is positive news out of the international markets. But there's more downside news out of Europe than upside at present," Macalister said.

"[New Zealand] is slowly ticking along but there is no sign of a sudden uplift."

ANZ chief economist Cameron Bagrie said there was no way Reserve Bank governor Alan Bollard would lift the official cash rate (OCR) "for a very long time".

He said floating rates were currently about 20 basis points above fixed rates and while that might make it look like the right time to fix, "everyone knows you can always get a discount, anyway". He said borrowers were likely to get more of a discount off a floating rate.

"There's no point fixing unless it's very, very close to a floating rate," Macalister said.

But BNZ chief economist Tony Alexander said this was as close as the rates were going to get. He said the pressure on fixed-term mortgage rates was moving up - even if the OCR was not expected to move until the end of the year. Increases in wholesale rates were providing strong upward pressure.

Bagrie said that was not necessarily the case. "For international funding, cost pressure has relieved. Wholesale costs did spike sharply but they have eased. But there's no quick fix, things could ramp up again."

All agreed that those hanging out for a lower rate would likely be disappointed.

Macalister said the Reserve Bank had indicated that at 2.5 per cent, the OCR "would never get lower."

Alexander said Kiwis would never see the extremely low interest rates that had been a feature in Europe, the United States and Britain recently, which were now available in Japan. He said it signalled a "completely munted" economy. "Japan's interest rate is 0.1 per cent. We wouldn't want to be like Japan."

Low interest rates provided opportunities, Macalister said. "Money has never been this cheap before, and never will be again. If people want to do things like buy an investment property, now is a good time."

For a household paying off a $200,000 mortgage, a two-year fixed rate of 5.79 per cent - the lowest available from the main banks - would result in a payment of $1408 a month. Floating on the lowest floating rate of 5.65 per cent would mean payments of $1392. In broad terms, every per cent increase would mean $110-$120 extra per month in repayments.

Lower interest rates would mean lower mortgage repayments, leaving most homeowners with more money left over to pay down their mortgages more quickly.

"Most property investors are sitting on high loan-to-value ratios. Good property investors will pay those down and be left with cashflow that returns more than you'd get from that money in the bank."

Bagrie said if rates were to rise, it would be on the back of a stronger economy and better labour market. "You probably wouldn't be as worried about a slightly higher fixed interest rate. But if things don't go well [and you've fixed], that's a grumpy situation to be in."